AI and Governments Battle for Capital as Global Bond Storm Begins
TREE NEWS reports: A global capital crunch is emerging as two massive forces—AI infrastructure spending and government deficit financing—compete for the same pool of savings. The collision is pushing up borrowing costs across the board and threatening to reshape asset markets.
The News: Two Insatiable Borrowers
Over the past two years, the AI narrative has dominated markets, driving valuations in chips, data centers, and cloud services. But the next phase of AI is not just about technology—it is about capital. Building and deploying large models requires massive upfront investment in chips, servers, cooling systems, land, and power. Five major AI hyperscalers have already issued about $220 billion in debt this year, more than double last year’s total. Wall Street expects AI-related capital expenditures to rise from roughly $700 billion this year to near $1 trillion next year, with total spending through 2030 potentially reaching $5 trillion.
At the same time, the U.S. government is borrowing at a historic pace. The federal budget deficit for fiscal 2026 reached $1.993 trillion, up 12% year-over-year and the highest since 2021. Federal spending totaled $7.4 trillion against $5.4 trillion in revenue, pushing the deficit above 6% of GDP—a level typically seen only during wars, financial crises, or recessions. Net interest costs have surpassed $1.1 trillion, exceeding defense and Medicare spending.
Meanwhile, Japan’s era of cheap money is ending. As Japanese yields rise, domestic investors are becoming more selective. Japan sold a net ¥4.45 trillion ($28 billion) of U.S. long-term Treasuries in the first half of 2025—the first half-year net sale since 2022—and reduced holdings of French debt. The world can no longer count on Japan as a reliable source of cheap capital.
Market Implications: Higher Rates, Tighter Credit
The simultaneous surge in demand for capital from AI and governments means that unless savings rise dramatically, the price of money—interest rates—must increase. This is already visible in credit markets: lower-rated AI borrowers are facing double-digit financing costs. Volta Infrastructure Holdings, for example, recently priced a $50 billion leveraged loan for a Norwegian data center project at a yield near 11%.
European bank stocks fell sharply as sovereign and corporate borrowing needs intensified. French assets are being repriced, with the spread between French and Italian 10-year bonds collapsing below zero. High-yield credit spreads, particularly for CCC-rated issuers, are showing early signs of stress.
Ray Dalio describes this as a debt-induced “heart attack”: when the cost of capital rises enough to crowd out marginal borrowers, the market enters a period of forced rationing. Governments and AI giants push up risk-free rates and credit spreads, squeezing out weaker borrowers in real estate, consumer, manufacturing, and small businesses. Eventually, the stress transmits to the real economy.
Key Takeaways for Investors
- Rates are likely to stay higher for longer. Structural demand for capital from AI and deficits means the era of ultra-low rates is over.
- Credit selection matters more than ever. The weakest borrowers will be squeezed first. Avoid low-rated AI-related debt and highly leveraged companies.
- Government bonds are not risk-free. With supply surging and traditional buyers retreating, sovereign yields may need to rise further to attract demand.
- Watch Japan. As Japanese investors repatriate capital, global bond markets—especially French and U.S. debt—could face renewed selling pressure.
- AI’s long-term potential is intact, but financing costs are a near-term risk. Even correct secular trends can suffer painful corrections when capital becomes scarce.
The global capital war has begun, and the bond storm may be just getting started.
