Stephen Kirchner recently surveyed a number of explanations for the sharp rise in US bond yields. His account draws partly on published commentary and partly on private correspondence, including an argument from macroeconomist Dimitris Valatsas. Kirchner starts with five contending theories.
- US fiscal deficits / Treasury supply: large government borrowing increases the supply of Treasuries and the demand for global saving.
- Foreign abandonment of Treasuries: foreign investors, particularly official holders, may be reducing their willingness to hold US government debt.
- The AI investment boom: large AI-related capital expenditure creates additional private demand for financing and competes for global saving.
- Fed/Treasury communication and policy expectations: changing expectations about monetary policy and official policy signals may have pushed longer-term yields higher.
- A higher r*: the return on technology capital has risen substantially, increasing the demand for capital and pushing up the natural rate of interest, r*.
Kirchner notes that Robin Brooks is sceptical that foreign investors are abandoning Treasuries and equally sceptical that the AI investment boom is responsible. Brooks emphasises the US fiscal deficit instead, arguing that government dissaving is the principal source of pressure on yields. I think Brooks dismisses the AI explanation too readily. I find Valatsas’s argument regarding r* persuasive, up to a point: where I part company is confidence rather than mechanism.
Kirchner is focused on the recent rise in US Treasury yields. I want to start with a broader question. How much of the movement is American and how much is part of a global repricing? Bond yields have risen substantially in Australia, the UK, Germany and Japan as well as the United States. That matters for identification. An explanation specific to the United States may explain the additional rise in Treasury yields, but by itself it cannot explain a common movement across global bond markets. The starting point here is therefore the global component, before turning to what is specifically American.
And there is something missing from the explanations of that global movement. Today’s yields are being compared, implicitly or explicitly, with a post-GFC world in which central banks became enormous, price-insensitive buyers of government bonds. That source of demand has largely disappeared. Governments remain large borrowers, a major new private investment cycle has emerged, and the global environment has become substantially more uncertain.
