The Bond Storm Hits: $40 Trillion in Debt Looms as 'AI Bubble' Becomes Investors' No. 2 Fear
Global bond markets were in turmoil this week as long-term government debt across major economies got sold off, pushing yields to their highest levels since the financial crisis — yet the turbulence hasn't dented equity investors' bullishness.
Stocks Stay Bullish, Bonds Flash Red
Bank of America's latest Global Fund Manager Survey shows equity allocations at a near five-year high. The prevailing bet: the Fed stays on hold, the U.S. economy remains resilient, AI investment keeps accelerating, and corporate earnings keep growing at double-digit rates. Nearly two-thirds of respondents don't expect AI to meaningfully disrupt the labor market within the next two years.
But bond-market risk is quietly climbing up the worry list. This month, "disorderly rising Treasury yields" became investors' second-biggest tail risk, trailing only an "AI bubble," with a "second wave of inflation" close behind.
The numbers behind the anxiety:
- 30-year Treasury yields hit their highest level since 2007, at 5.32% — up roughly 46 basis points since late June
- Benchmark 10-year yields climbed to 4.74%, near an 18-month high
- Yields in France, the UK, Germany, and Japan surged in tandem, pushing the global government bond composite yield to 4.5% — its highest since 2015
Charu Chanana, chief investment strategist at Saxo Bank Singapore, notes that if rising yields reflect improving growth and upgraded earnings forecasts, that can coexist with strong risk assets. But if investors are demanding higher compensation to absorb a flood of government issuance, the market reads it very differently.
Debt Out of Control: $40 Trillion Looming
Total U.S. federal debt is projected to cross $40 trillion by the end of August — more than double what it was a decade ago. Of the $20 trillion added since 2016, the two parties have contributed roughly equally: about $11 trillion during Trump's combined terms, and $9 trillion during Biden's four years.
BofA chief investment strategist Michael Hartnett projects the debt will hit $50 trillion by summer 2029 — adding roughly $1.1 trillion every four months. Interest expense on the debt is set to approach $1.5 trillion, nearing the size of the entire federal deficit, which is expected to top $2 trillion this year.
The Fed Can't Save the Day — Financing Costs Are the Market's Problem Now
Anyone hoping the Fed will ride to the rescue may be disappointed. This month's data — rising unemployment, modestly cooling inflation — has pulled the market's odds of a September rate cut down from roughly 52% a week ago to about 33%. Whether the Fed cuts or holds, neither option curbs government spending; financing costs are left entirely to the market to price.
That's showing up directly in auction results: last week's 30-year Treasury auction cleared at the highest yield since 2001, and this week's 20-year auction is expected to push the government's debt-servicing cost to its highest level in more than 25 years. The 10-year yield has climbed from just 1.24% to 4.7% in five years.
BlackRock Investment Institute's Wei Li isn't surprised: "This is consistent with our long-held view that the world is being shaped by scarce supply — investors need greater compensation to hold long-term government bonds. Expanding public-sector borrowing and rising inflation uncertainty reinforce that trend."
AI Capex Is Intensifying the Fight for Capital
An easy-to-miss variable: Big Tech is also piling on debt to fund trillion-dollar AI spending, intensifying the global competition for capital — governments and tech giants are now bidding against each other in the same funding pool.
To be fair, household wealth is hitting records too: from 2016 through Q1 this year, total wealth held by U.S. households and nonprofits grew nearly 93% to a record $204.5 trillion, much of it driven by a stock market up more than 250% over the past decade. But equity gains and sovereign debt are fundamentally different things — stacked in $1,000 bills, today's national debt would tower over 400 miles high, 72 times the height of Everest, working out to more than $118,000 per taxpayer.
Hartnett sums up current sentiment as being driven by multiple "no's": no landing for the economy, no rate hikes from the Fed, no cuts to AI capex — and almost no bears left in the market. But with debt approaching $40 trillion and still accelerating, that's no longer a punchline.