Apollo Chief Economist Torsten Slok has indicated that growing competition from companies issuing their own bonds may lead to higher interest rates, impacting the Treasury Department's efforts to ensure demand for its debt. Wall Street estimates project that the volume of investment-grade debt to be issued this year could reach up to $2.25 trillion. This increase is partly driven by the artificial intelligence (AI) sector, with hyperscalers and related firms seeking bond market funding for substantial investments in data centers and infrastructure. Slok raised questions regarding the source of demand for this investment-grade paper and its potential influence on Treasury and mortgage rates.
U.S. Debt and Fiscal Outlook
The U.S. national debt has exceeded $38 trillion. The federal government borrowed $601 billion during the first three months of the 2026 fiscal year, which commenced in October 2025. This figure represents a $110 billion reduction compared to the deficit in the same period the previous year, partly due to tariff revenues. However, factors such as a potential Supreme Court decision striking down global tariffs and an expected increase in tax refunds due to new tax cuts could affect future government revenue. Additionally, a stated commitment to increase defense spending could further enlarge federal budget deficits. Despite the Federal Reserve's recent rate cuts, Treasury yields have remained stable, suggesting limited relief for the government's debt-servicing costs. Slok concluded that the significant volume of fixed-income products entering the market in 2026 is likely to place upward pressure on rates and credit spreads.
Risks of Fiscal Dominance and Investor Shift
To maintain sufficient demand among bond investors, Treasury yields must remain competitive relative to other offerings. A failure to attract enough investors increases the risk of 'fiscal dominance,' a situation where a central bank must intervene to finance widening deficits. Former Treasury Secretary Janet Yellen recently warned of this, noting that the preconditions for fiscal dominance are strengthening, with debt projected to reach 150% of GDP over the next three decades.
Over the past decade, the composition of U.S. debt holders has shifted significantly from foreign governments, which are less price-sensitive, to profit-driven private investors. Geng Ngarmboonanant, a managing director at JPMorgan and former deputy chief of staff to Yellen, highlighted that foreign governments, which held over 40% of Treasury bonds in the early 2010s, now account for less than 15% of the overall Treasury market. This change could render the U.S. financial system more susceptible during periods of market stress.