Record 18-Year High: U.S. Treasury Yields Stick Above 5%, AI Bond Issuance Adds Pressure

The $30 trillion U.S. Treasury market faced renewed selling in July, pushing bond yields toward a concerning milestone.

The 30-year U.S. Treasury yield rose 1.6 basis points on Wednesday (22nd) to 5.146%, marking 12 consecutive days above 5%—the longest such streak since 2007. According to Dow Jones Market Data, this is a rare occurrence not seen in nearly 18 years.

Although June inflation cooled and oil prices retreated following a U.S.-Iran ceasefire agreement, the U.S. Consumer Price Index (CPI) rose 3.5% year-on-year, still far from the Federal Reserve’s 2% target. Meanwhile, the fragile Middle East peace quickly unraveled, sending global Brent crude prices back above $94 per barrel.

Dustin Reid, Chief Fixed Income Strategist at Canadian investment firm Mackenzie Investments, said: "The biggest enemy of long-term bonds is inflation. If inflation remains elevated for longer, investors will demand higher compensation."

While recent energy price declines have slightly pulled yields from their peaks, the artificial intelligence (AI) investment boom is driving hyperscalers to issue massive volumes of long-term corporate debt, creating fresh supply pressure on the market.

According to BondCliQ data, major AI infrastructure investors—Microsoft (MSFT-US), Amazon (AMZN-US), Alphabet (GOOGL-US), Nvidia (NVDA-US), Meta (META-US), and Oracle (ORCL-US)—have nearly $500 billion in outstanding bonds issued this year.

This massive AI-driven financing demand is giving bond investors more options beyond the 30-year U.S. Treasury, which offers a yield of around 5%.

Market participants often say the 5% U.S. Treasury yield has no "magical" significance—it's merely a psychological round number that draws attention, not a hard ceiling preventing further U.S. government borrowing.

In contrast, the 10-year U.S. Treasury yield, a benchmark for mortgage pricing, remains below 5%, closing Wednesday at 4.657%, near its peak during the U.S.-Iran conflict. The 30-year fixed mortgage rate now stands at approximately 6.55%, a level that could suppress refinancing demand. The 2-year U.S. Treasury yield rose to 4.301% on Wednesday, the highest since February 2025.

Unlike in 2023 and earlier this year, the 30-year Treasury yield, once above 5%, is proving increasingly difficult to pull back quickly. This suggests the cost for the U.S. government to manage its massive debt and fiscal deficit will continue to rise.

Alexander Payne, Head of Mortgages, Agency Bonds, and Volatility at Vanguard, noted that this bond sell-off lacks a single clear cause, but there is also no surge of buyers rushing in.

He stated: "With large U.S. fiscal deficits and historic capital expenditures continuing for AI infrastructure, there will be many opportunities ahead to buy long-term bonds at higher yields. That’s a unique feature of today’s market."

U.S. Defense Secretary Pete Hegseth testified before Congress on Tuesday that the U.S.-Iran conflict has already cost $37.5 billion, with the Trump administration requesting an additional $67 billion from Congress to fund ongoing military operations.

Meanwhile, the U.S. debt-to-GDP ratio surpassed 100% in the spring, with total national debt nearing $40 trillion.

At the same time, despite rising U.S. Treasury issuance, foreign investor participation in the market has gradually declined in recent years.

Brij Khurana, Fixed Income Portfolio Manager at Wellington Management, said: "The Treasury market needs to transition from foreign to domestic investors, but domestic capital is likely only to step in during stock market downturns."

He added: "If the equity market sees a clear correction, the hedging value of bonds will become more pronounced."

Reid believes that if the 30-year U.S. Treasury yield reaches 5.25%, the U.S. Treasury Department may begin to feel uneasy.

"The Treasury doesn’t want the long end of the yield curve to spiral out of control, as that would pose risks to equities and overall valuations," he said.