It Is More Than Oil Prices Pushing Up Interest Rates

Daily, the financial press links upward movements in long-term interest rates to the latest price of oil, attributing the relentless rise in rates to developments in the Persian Gulf conflict. There is no question that inflationary pressures emanate from supply interruptions caused by current hostilities involving the US and Iran. Bond markets have for months been besieged by the inflationary impact of oil prices on US Treasury yields. However, bond markets are increasingly concerned with a raft of new debt from both government and private sector issuers. Oil price surges may be a necessary condition for higher interest rates, but they are not a sufficient one.

Yields on 10-year Treasuries climbed to 5.34% today—a level last seen almost a quarter-century ago—as traders warned that the $32 trillion US government bond market weighs heavily on investor portfolios. Meanwhile, UK 30-year gilt yields climbed above 6% for the first time since 1998. In an unprecedented development, Japanese bond yields rose to 3.1%, up from near-zero levels less than five years ago. US, European, and Japanese bond markets appear to be feeding off each other, as interest rate differentials directly drive currency movements, trade, and investment decisions.

Overriding all factors affecting borrowing costs is the massive volume of new debt issued by governments. The US Treasury alone is expected to issue $2.5 trillion in new debt annually to fund recurring federal deficits.

At the same time, tech hyperscalers—Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), Meta (META), and Oracle (ORCL)—are seeking vast capital to fund data centers, custom chips, and power generation. These corporations are expected to issue $150 billion to $200 billion in direct investment-grade corporate bonds this year alone. This is just the beginning; long-term needs are projected to surpass $1 trillion—a dramatic shift for an industry that previously funded almost all capital expenditure through internal cash flow and equity.

Crowding out by hyperscalers means tech giants are directly competing for capital with the $32 trillion US Treasury market. Central banks are taking notice as tech industry financing makes borrowing more expensive for traditional corporate issuers. Market watchers describe the entrance of tech giants into the bond market as transformational. Portfolio managers must now weigh long-term corporate bonds issued by tech giants against government Treasuries. While it remains early to tell whether managers are actively selling Treasuries to make room for tech credit, portfolios are undoubtedly being reordered to capture higher yields.

In summary, massive sovereign borrowing demands are colliding with an unprecedented wave of AI-driven corporate financing. The simultaneous demand shock from these two distinct borrower classes is driving a structural upswing in long-term global interest rates.