US Treasuries and Record Corporate Debt Battle for Market Funds as War Spending Pushes Up Federal Borrowing Costs

Why do investors still favor government bonds and corporate bonds when borrowing costs rise?

Savings bonds issued by the U.S. Department of the Treasury. Image source: Getty Images

Amid a surge in capital expenditure in artificial intelligence, large-scale issuance of corporate bonds has increased. Meanwhile, the ongoing war with Iran has further widened the fiscal deficit, forcing the U.S. Treasury to find ways to make its bonds more attractive to investors.

Last Tuesday, U.S. corporate bond issuance hit a record high for a single day. At that time, President Donald Trump suggested that the war might end soon, briefly calming market sentiment and prompting a rush of new bond issuances by companies.

By the close of that day, the total issuance of investment-grade bonds exceeded $65 billion, breaking the single-day record of $52 billion set in 2013. According to sources familiar with the matter, this wave of bond issuance was led by e-commerce giant and AI industry heavyweight Amazon, which raised $37 billion.

This issuance far exceeded the company’s initial guidance of $25 billion to $30 billion. Due to investor demand far surpassing supply, the offering ultimately received about $123 billion in orders.

The large-scale issuance of corporate bonds is enough to impact the U.S. Treasury market, where daily trading volume exceeds $1 trillion. Deutsche Bank analysts noted in a report last week that this wave of corporate bond issuance has put upward pressure on the 10-year U.S. Treasury yield, which rose by as much as 6 basis points during trading, reaching a high of 4.16%.

Thorsten Slok, Chief Economist at Apollo Global Management, previously warned that large-scale issuance of corporate bonds could increase the borrowing costs for the U.S. federal government. In a January report, he stated that Wall Street expects the total issuance of investment-grade bonds in 2026 to reach as high as $2.25 trillion.

This is driven by the AI boom, which is prompting many companies—including large-scale corporations and related firms—to enter the bond market to fund massive investments in data centers and other infrastructure.

Slok said, “The surge in large-scale corporate bond issuance raises the question: who will be the marginal buyers of investment-grade corporate bonds? Will funds flow from the Treasury market into corporate bonds, putting upward pressure on interest rates? Or will funds come from the mortgage-backed securities market, leading to wider mortgage spreads?”

Since January, market conditions have changed dramatically. The Iran war is evolving into a prolonged conflict, causing oil prices to soar. Along with this, bond yields have risen due to inflation expectations, further increasing borrowing costs.

Daily bombings of Iran have also intensified fiscal deficit pressures. In just the first five months of this fiscal year, the deficit has already reached $1 trillion. The New York Times reported that U.S. Defense Department officials told Congress last week that the costs of the first six days of the war exceeded $11.3 billion.

Meanwhile, Trump has pledged to increase U.S. annual defense spending from $1 trillion to $1.5 trillion, which could further exacerbate the fiscal deficit.

The unsustainable expansion of U.S. debt has raised increasing warnings on Wall Street. But for now, investors continue to show strong demand for both corporate bonds and U.S. Treasuries.

A few days after Amazon’s large bond issuance, a $22 billion 30-year Treasury auction on Thursday received strong bids, partly benefiting from the significant rise in yields since the outbreak of war.

In last month’s U.S. Treasury issuance, demand for the 30-year bonds hit a record high, with overseas buyers being the main purchasers.

Slok stated in a report on February 20, “Ultimately, the data from U.S. Treasury auctions indicates that demand for long-term U.S. government bonds remains very strong.” (Fortune Chinese)

Translator: Zhong Huiyan - Wang Fang