The U.S. 10-year Treasury yield has risen more than 100 basis points this year and at one point topped 5%, its highest level in 24 years before a recent dip. The move has renewed debate among investors and economists about what is pushing long-term borrowing costs higher, with some Wall Street analysts pointing to the surge in debt issued by large technology companies to fund artificial intelligence infrastructure, while others argue the federal government's finances are the main concern.
The climb in yields began after the outbreak of the Iran war in late February. A spike in oil prices fed expectations that the Federal Reserve would raise interest rates, pushing up yields across the curve. Some strategists have argued that the heavy borrowing by hyperscale cloud and data-center operators, which are issuing large volumes of debt to finance AI spending, is crowding out demand for Treasuries and lifting yields as a result.
Robin Brooks of the Brookings Institution disputes that explanation. He argues that a rising fiscal risk premium, meaning the extra compensation investors demand for holding U.S. government debt, is the main driver. Brooks described last week's selloff as a "natural experiment" in which the evidence, in his view, points toward fiscal concerns rather than corporate supply. A strong jobs report pushed the two-year yield up by more than economic growth alone would explain, and the 10-year, 10-year forward yield did not fall, a pattern he cites as support for the fiscal-risk view.
Brooks also noted that corporate borrowing remains far below the levels seen during the early-2000s information technology bubble, which weakens the argument that AI-related debt is the dominant force in the bond market. The question of whether AI debt or fiscal stress will drive long-term yields is, for now, unresolved.
The federal government's own numbers add context to the fiscal concern. The federal deficit for fiscal 2026 reached $1.99 trillion, up 12 percent from the prior year. Revenue rose 3 percent to $5.4 trillion, while spending increased 6 percent to $7.4 trillion. Total federal debt stands at about $40 trillion.
Interest costs are a central part of that picture. Gross interest costs reached $1.36 trillion, with an average interest rate of 3.53 percent. Net interest, which subtracts interest received by the government, totaled $1.05 trillion, up 8 percent, or roughly $2.9 billion per day. Net interest is now the third-largest federal budget line item and equals about 3.2 percent of gross domestic product, a record according to the Peterson Foundation. The average interest rate on federal debt is more than double its 2021 level.
The Committee for a Responsible Federal Budget has warned that the trajectory raises the risk of a debt spiral and has urged the President, the Treasury and Congress to intervene with fiscal measures. Whether the recent market turmoil reflects corporate supply, government finances or both will shape how investors and policymakers respond as borrowing costs remain elevated.