As U.S. debt soars past $38 trillion, the flood of corporate bonds is a growing threat to the Treasury supply

Core Insights - The Treasury Department is facing challenges in ensuring investor absorption of new debt supply due to increasing competition from corporate bond issuances, which could lead to higher rates [1][2] - The anticipated volume of investment-grade debt for this year is estimated to reach up to $2.25 trillion, driven by the AI boom and significant investments in infrastructure by hyperscalers and related firms [1][2] - The U.S. federal debt has surpassed $38 trillion, with $601 billion borrowed in the first three months of the 2026 fiscal year, indicating a substantial fiscal position [2][3] Group 1 - The increase in corporate bond issuance raises concerns about the marginal buyers of investment-grade paper, potentially leading to upward pressure on rates and mortgage spreads [2] - The federal government has seen a reduction in the deficit by $110 billion compared to the same period last year, aided by tariffs that have helped revenue exceed spending [3] - Despite recent Federal Reserve rate cuts, Treasury yields have remained stable, suggesting limited relief on debt-servicing costs, which contribute to the overall budget deficit [4] Group 2 - To maintain sufficient demand among bond investors, Treasury yields must remain competitive; failure to attract investors could lead to fiscal dominance, where the central bank may need to finance widening deficits [5] - The conditions for fiscal dominance are strengthening, with debt projected to rise to 150% of GDP over the next three decades [6]