At a crossroads for interest rates

• Enguerrand Artaz
  Strategist
  La Financière de l’Échiquier (LFDE)

…and equity markets are beginning to show signs of unease as interest rates soar across the globe. The lack of progress in the Iranian conflict, following Donald Trump’s announcement that he did not wish to extend the ceasefire which expired on 17 August, has certainly acted as a short-term catalyst, but the causes of this trend run deeper.

Beyond fears of a resurgence in inflation linked to Iran, the fixed-income market finds itself at the crossroads of issues that are fundamental to the economy and the markets: the deterioration of public finances and the rising debt burden in Western countries on the one hand, and AI and the financing of its colossal investment expenditure on the other. These two issues are self-perpetuating. To finance AI developments, the tech giants – the hyperscalers – have turned heavily to the bond markets in recent months. From barely 1 per cent in 2024, bond issues intended to finance AI reached 18 per cent of total global investment-grade issue¹ in the first half of 2026. This strong entry by the hyperscalers into the credit market has led to a global surge in issuance volumes, up 36 per cent since the start of the year compared with the same period last year.

Investors are finding it increasingly difficult to absorb this influx of bond supply. Or rather, it is leading to a shift in investment priorities, with long-term government debt being the first casualty. It must be said that the competition is direct. Firstly, hyperscalers finance themselves predominantly through long-term debt. Around 70 per cent of the debt issued has a maturity of seven years or more, with an estimated average maturity of around 15 to 17 years. A recent study by Goldman Sachs² estimates that issuances by hyperscalers account for more than 40 per cent of total global investment-grade issuances with maturities of over 15 years.

Furthermore, technology companies are currently paying fairly substantial premiums compared with government bonds in the various currencies in which they issue debt. In recent days, for example, Alphabet issued a 20-year bond in Australian dollars at a rate of 6.95 per cent… whilst the 20-year Australian sovereign rate stands at 5.45 per cent. Finally, the investors likely to buy hyperscalers’ debt are now the same ones who hold government debt. In the United States in particular, as the Fed reduced the size of its balance sheet, and whilst foreign central banks saw their holdings of US debt stagnate, it was private investors who stepped in. They now hold 73 per cent of US debt, compared with 50 per cent 10 years ago. Yet it is these very same investors who are most likely to buy debt issued by hyperscalers – often at a comfortable premium, with similar maturities, and without the risks of fiscal drift associated with sovereign bonds.

In summary, we are witnessing a clear crowding-out effect in the bond markets, with AI debt flooding the market and being absorbed at the expense of government bonds. This phenomenon is only just beginning. On the one hand, AI’s financing needs are growing: we can expect several hundred dollars’ worth of new bond issues in the coming quarters. On the other hand, governments’ financing needs are also continuing to rise, either due to the ongoing deterioration in public finances (France, the US, the UK) or to fund structural investments (Germany, and to a lesser extent Japan). Unless we envisage a return to massive asset purchases by central banks – which does not seem to be on the agenda – this increased competition can only fuel a further rise in interest rates. This, in the long term, carries risks for the financing of the global economy.

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¹Refers to issuers or bonds with a credit rating ranging from AAA to BBB or from Aaa to Baa3. These securities carry a low risk of default.
²IG Credit – Too Much, Too Fast, Jeffrey Papai, 12 July 2026

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