Structural Supply and Demand Pressures Set to Keep Long-Term US Treasury Yields High

Long-term United States Treasury yields are unlikely to decrease significantly in the near term. A combination of intertwined supply and demand factors continues to complicate efforts by policymakers to cap borrowing costs.

The renewed surge in interest rates reflects immediate concerns regarding inflation, alongside longer-term questions about how the market will absorb a large volume of bonds sold by governments and high-quality corporate issuers. Furthermore, a shift in the makeup of buyers toward groups that demand higher rates is adding to the pressure.

US Treasury Secretary Scott Bessent faces significant structural challenges in his efforts to pull down long-term borrowing costs. Arif Husain, head of global fixed income investing for T. Rowe Price, noted that until global governments deliver a credible plan to address growing deficits, the bond market will continue to demand higher yields. Husain pointed out a supply-demand mismatch in the cash bond market, with fewer price-insensitive buyers willing to take on Treasury supply without higher yields.

Federal government debt has surpassed $40 trillion, contributing to a deteriorating fiscal picture. A higher term premium—the portion of the yield reflecting investors' willingness to commit capital for decades—and heightened inflation expectations have driven the backup in rates.

Research by Hanno Lustig, a finance professor at Stanford University and senior fellow at the Stanford Institute for Economic Policy Research, indicates that hedge funds and other price-sensitive firms have supplanted official, longer-term, less-sensitive buyers such as overseas central banks. These shifts have increased market price sensitivity and amplified volatility in long-term Treasury prices.

At the same time, corporate issuers, particularly those involved in the artificial intelligence data center buildout, are borrowing rapidly. Wall Street anticipates that big tech firms will spend more than $730 billion on AI infrastructure this year, up from $400 billion last year, with a significant portion funded through borrowing. Strong corporate fundamentals, including soaring profits—such as a 52 percent second-quarter profit increase for S&P 500 companies reported by FactSet—make corporate debt appealing to investors compared to federal government debt.

As the Treasury market competes with investment-grade corporate issuers for long-term capital, spreads between the two categories have narrowed significantly. Thierry Wizman, global FX and rates strategist at Macquarie, noted that investors increasingly view corporate debt as a safer option relative to government debt.

Other analysts point out that structural changes in the market developed over the past couple of decades have made Treasury bonds increasingly vulnerable to periodic supply-demand imbalances. Ryan Swift, U.S. bond strategist at BCA Research, noted that these shifts are long-standing.

Uncertainty surrounding inflation, exacerbated by energy price impacts from the unresolved conflict with Iran, remains an aggravating factor. Market participants agree that these entrenched supply and demand issues are largely beyond the control of the Treasury Department, keeping long-term rates elevated.

"The challenges facing US Treasury yields highlight how macroeconomic factors and government fiscal deficits directly impact the broader cost of capital. For founders and investors in the startup ecosystem, rising benchmark borrowing costs translate into tighter liquidity and more selective fundraising environments globally. When sovereign debt competes with corporate issuance—especially for high-growth sectors like AI infrastructure—market participants must navigate higher expectations for risk and return." — Dr. Shishir Gupta, Founder & CEO, StartupLanes