US Treasury yields are being driven higher by mounting concerns over America’s public finances rather than borrowing by technology companies to fund the artificial intelligence boom, according to Robin Brooks, a senior fellow at the Brookings Institution.
Brooks said last week’s sharp stock market sell-off provided a “natural experiment” for testing competing explanations for the rise in bond yields. The 10-year Treasury yield had climbed by more than one percentage point this year, rising above 5% and briefly reaching its highest level in 24 years, before easing as investors sought shelter in government debt.
The increase began after the Iran war started in late February, pushing up oil prices and raising expectations that the Federal Reserve could increase interest rates to contain renewed inflation.
At the same time, large technology companies have issued substantial amounts of debt to finance capital spending and infrastructure linked to the AI boom. That borrowing has competed with the Treasury for investors’ money as the US government seeks to fund a $2 trillion budget deficit and service around $40 trillion of debt.
Some Wall Street analysts have argued that the flow of corporate debt has crowded out US government bonds, forcing the Treasury to offer higher returns at auctions. Brooks rejected that interpretation in a post published on Saturday.
“On one end of the spectrum are people like me who think this is a rising fiscal risk premium as our public debt grows out of control,” he wrote. “On the other end are folks who say it’s hyperscaler debt issuance that’s pushing up yields, so there’s no sign fiscal policy’s in trouble.”
US Treasury yields point to fiscal risk, economist says
Brooks said corporate borrowing remained well below the levels seen during the information technology bubble of the early 2000s, while public borrowing was historically high and more likely to be pushing up yields.
He also pointed to the bond market’s response to the latest monthly jobs report, which showed payroll growth at more than twice the consensus forecast. The two-year yield rose by more than previous upside surprises in employment data would suggest, he said, weakening the argument that higher yields were simply a result of stronger economic growth powered by AI.
Another measure cited by Brooks was the market-implied yield on a 10-year Treasury security issued 10 years from now. The gauge reflects the premium investors demand for holding government debt over the long term, including concerns about the path of US debt and deficits.
If the AI boom were the main reason for higher long-term yields, Brooks argued, that forward yield should have fallen alongside two-year and 10-year Treasury yields during the recent market moves.
“It didn’t and that in my mind further cements the case for the fiscal risk premium,” he said.
He added: “The midterm elections and the AI sell-off that’s ensued have given us the perfect natural experiment to disentangle what’s going on with long-term yields. They’re up because of mounting fiscal stress, not because of AI.”
The warning comes as official figures show the US budget deficit widened to $1.99 trillion in the 2026 financial year, 12% higher than the $1.78 trillion shortfall recorded the previous year.
Revenue rose by 3% to $5.4 trillion, while spending increased by 6% to $7.4 trillion. Social Security and Medicare were the largest areas of expenditure, but interest payments on the national debt ranked third, ahead of defence spending and Medicaid.
Gross interest costs reached $1.36 trillion, with an average interest rate of 3.53%. Net interest payments rose 8% to $1.05 trillion, outpacing growth in spending, revenue and gross domestic product.
The net interest bill amounted to about $2.9 billion a day and represented 3.2% of GDP, according to the Peter G Peterson Foundation, exceeding the previous record set in 1991.
“Higher interest begets more debt, and greater debt begets higher rates and higher interest. Eventually, the whole thing could come crashing down,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in September.
“That’s why Washington needs a fiscal intervention now, before it’s too late. The President, the Treasury Secretary, and Congressional leadership need to understand the severity of this issue. There are no easy fixes, and we can’t just wish this problem away.”
