The Real Cause of Soaring US Long-Term Interest Rates: A Surge in Ultra-Long-Term Bond Issuance by Big Tech

The U.S. financial market has recently been volatile due to several factors. First, the U.S. Securities and Exchange Commission (SEC) announced new regulations, impacting the market. Subsequently, the U.S. Treasury Department implemented Treasury buybacks, eliciting market reactions. Concurrently, the U.S. Commodity Futures Trading Commission (CFTC) also introduced new regulatory measures, leading to various policy changes occurring simultaneously. These factors have complexly interacted, increasing market uncertainty.

Skepticism about the effectiveness of the U.S. Treasury Department's bond buyback measures is being raised in the market. Currently, the prevailing assessment is that their impact on the market is not significant. In this situation, former President Donald Trump is strongly advocating for the passage of the 'Clarity Act,' adding political pressure, which further complicates discussions surrounding buybacks.

While stock market buybacks are generally perceived as irregular actions taken by companies as needed, buybacks in the government bond market are regular. The U.S. Treasury Department issues government bonds quarterly, and buybacks have been consistently implemented within these issuance cycles to manage market liquidity and enhance the efficiency of the bond market. This is an important policy tool for maintaining the stability of the government bond market.

On August 19th, the U.S. Treasury Department's announcement of a bond buyback caused significant shock in the market. This buyback focused specifically on long-term bonds, which differed from the Treasury's usual regular buyback method. This unusual measure led market participants to make various speculations about the Treasury's intentions and future policy directions, increasing market uncertainty.

Long-term bonds tend to gradually lose liquidity as time passes after issuance. This means that their trading volume decreases, making them harder to buy and sell in the market. In the bond market, recently issued and actively traded benchmark bonds are called 'on-the-run,' while less actively traded, non-benchmark bonds are distinguished as 'off-the-run.' Market participants primarily prefer and trade on-the-run bonds, which can further exacerbate liquidity issues for off-the-run bonds.

The U.S. Treasury Department announces its Quarterly Refunding Announcement (QRA) for bond issuance every quarter, which includes buyback plans. However, announcing an additional buyback just two weeks after the QRA on August 5th is considered highly unusual. This is the first such instance since the buyback program was reinstated in 2024. Given this background, it is highly likely that the Treasury will further expand the scale of buybacks in the next QRA.

The Treasury's buyback increases the liquidity of off-the-run Treasury bonds and, as long as the Treasury does not increase additional long-term issuance, reduces the supply of long-term bonds in the market. This can partially improve the supply-demand imbalance in the long-term market. More importantly, this buyback announcement can be interpreted as a strong policy signal, a 'bespoke put.' This implies that if long-term interest rates surge, the Treasury is conveying a strong willingness to actively intervene in the market to curb the rise in interest rates. This intention for policy intervention can raise expectations for market stabilization.

The U.S. Treasury Department's strategy of suppressing long-term Treasury bond issuance and primarily raising funds through short-term bonds produces similar effects to the Federal Reserve's 'Operation Twist.' This can be interpreted as an attempt to alleviate upward pressure on long-term interest rates in the market. Particularly, Treasury Secretary Janet Yellen has explicitly mentioned the term 'twist,' signaling this policy direction, which further increases interest in the Treasury's future bond issuance and buyback policies.

The biggest reason for the recent surge in U.S. long-term interest rates is the drastic increase in ultra-long-term bond issuances by major big tech companies, often referred to as 'hyperscalers.' This year alone, four major big tech companies have issued approximately $200 billion (200 billion dollars) in 30-year maturity bonds. Since the long-term bond market has a relatively limited demand base, such a large increase in supply inevitably leads to a decline in bond prices (an increase in interest rates). As a result, the aggressive fundraising by big tech companies has acted as a major factor driving up the overall long-term interest rate level.

Major big tech companies are aggressively raising capital to meet massive investment demands, such as building data centers. The $200 billion worth of bonds issued by these companies dwarfs the approximately $30 billion quarterly U.S. Treasury buyback volume. This massive amount of supply entering the market and being fully sold has exerted significant supply pressure on the long-term bond market, serving as a primary cause for the rise in Treasury yields.

In the bond market, there is a 'market segmentation hypothesis,' which theorizes that the demand bases for short-term, medium-term, and long-term bonds are separate. Particularly, the main demanders for 30-year ultra-long-term bonds are limited to institutional investors with long-term liabilities, such as insurance companies and pension funds. These institutions seek stable long-term returns and prefer bonds of specific maturities, thus significantly influencing the overall supply and demand structure of the market.

Bonds issued by big tech companies are highly creditworthy, often classified as Investment Grade. The large-scale ultra-long-term bonds issued by these companies have resulted in an approximately 20% increase in the total issuance of global investment-grade ultra-long-term bonds. This massive increase in supply has directly contributed to raising overall interest rate levels in the market, further exacerbating the rise in long-term interest rates.

In the bond market, 'long-term' generally refers to maturities of 10 years or more. Globally, when comparing government bond yields between countries, 10-year maturity bonds are usually used as the standard. The South Korean bond market historically focused on 3-year maturities but is gradually showing a trend towards longer maturities, developing into a more advanced market form. Thus, the maturity structure and development of the bond market reflect the characteristics of each country's financial market.

Institutional investors capable of absorbing 30-year ultra-long-term corporate bonds are concentrated in a few countries, such as the U.S. and the U.K. Other countries find it difficult to absorb such ultra-long-term bonds. The U.S. Treasury Department's focus on 30-year Treasury bond buybacks can be interpreted as a defensive strategy that considers these market characteristics. The 30-year market has a thin order book, meaning even small policy interventions can have a significant effect. The Treasury likely determined this to be an effective point for intervention to alleviate upward pressure on long-term interest rates.

As market doubts grow regarding structural issues related to U.S. long-term Treasury bond issuance, the credibility of Treasuries, once considered a safe-haven asset, is wavering. This situation, ironically, is creating positive opportunities for alternative assets such as Bitcoin and gold. As market participants seek hedging instruments to replace unstable Treasuries, gold and Bitcoin are clearly trending upward, strengthening their role as stores of value.

The primary causes of rising U.S. long-term interest rates include fiscal instability and inflation risk. Increasing government debt and high inflationary pressure compel bond investors to demand higher compensation. Crucially, as demand from foreign countries, previously major buyers of Treasury bonds, decreases, while long-term bond issuance by big tech companies significantly increases, the state of oversupply intensifies, fueling interest rate hikes.

The weighted average maturity of U.S. Treasury bonds had fallen to 5.2 years during the COVID-19 period. Currently, the proportion of bonds with maturities of 1 year or less has increased to 33% of the total, up from an original 28%. Experts anticipate that the Treasury will continue to expand this proportion of short-term funding for the time being, which is expected to affect market liquidity and the interest rate structure.

The current U.S. short-term bond market (1 year or less maturity) is approximately $10 trillion. In contrast, money market funds (MMFs) stand at around $3 trillion, and the market capitalization of stablecoins is only about $300 billion (300 billion dollars). Thus, the scale of stablecoins is woefully insufficient to meet the massive demand of the short-term bond market. For stablecoins to play a significant role, they need to grow by trillions of dollars more than their current size.