The sell-off in long-term US debt intensifies, and Federal Reserve officials deny that their credibility is being questioned, government borrowing and AI financing are “competing for capital” as the main reason

The Zhitong Finance App learned that US long-term treasury bonds have continued to be sold off recently, and the yield on 30-year US bonds once rose to the highest level since 2007. Regarding market concerns that soaring US bond yields may mean investors are questioning the Fed's ability to control inflation, both Fed officials downplayed it on Thursday, and believed that the US government's huge financing needs and capital requirements brought about by artificial intelligence infrastructure construction are important reasons driving up long-term yields.

St. Louis Federal Reserve Chairman Mussalem said in an interview on Thursday that the global capital market is currently experiencing increasingly fierce “competition for capital.” On the one hand, the US government needs to finance fiscal expenses through large-scale issuance of treasury bonds; on the other hand, artificial intelligence infrastructure construction also requires huge capital investment, and this kind of financing demand has expanded from the US to the world.

Mussalem said, “Government financing requirements, combined with AI infrastructure construction financing, are currently forming a capital competition.” At the same time, he stressed that the market's long-term inflation expectations remain stable, so the recent sell-off in the bond market does not mean that investors are questioning the Federal Reserve's policy credibility.

Generally speaking, investors may also demand higher long-term bond yields as compensation if they think the Fed is not determined enough to control inflation. However, Mussalem believes that there is currently no clear evidence that this is happening.

Recently, the US Treasury bond market has come under significant pressure, especially long-term bonds. Investors continued to sell off US bonds, driving the 30-year US Treasury yield to the highest level since 2007. Market concerns mainly focus on issues such as the rapid expansion of US government debt, increased demand for fiscal financing, and inflation exceeding the Federal Reserve's 2% target for more than five consecutive years.

The size of the US government debt surpassed $40 trillion for the first time on Wednesday. At the same time, the boom in artificial intelligence investment is driving massive financing for technology companies and infrastructure developers to build data centers, procure chips, and obtain electricity resources. The simultaneous competition between the government and enterprises for long-term capital is also thought to be driving up overall financing costs.

San Francisco Federal Reserve Chairman Daly expressed similar views during an interview on the same day. She said that she doesn't think the Fed's policy credibility is at risk, and she has not seen any evidence that the Fed currently urgently needs to stabilize the market through preventive interest rate hikes.

Daly believes that the performance of the US Treasury bond market may instead indicate that the current position of monetary policy is generally appropriate. At the same time, she pointed out that when analyzing the policy signals released by bond prices, it is also necessary to consider the huge capital requirements brought about by investment in AI products and infrastructure.

The US Treasury announced on Wednesday that it will expand the scale of long-term treasury bond repurchases, hoping to improve market liquidity and ease the selling pressure on long-term bonds. After the news was announced, it drove a marked decline in long-term yields, but this effect was relatively short lived, and most of the previous decline had already been recovered by Thursday. Daly declined to directly comment on the Treasury Department's actions to expand repurchases of US bonds.

Although Mussalem believes that the recent sell-off in the bond market is not a credit crisis for the Federal Reserve, his own attitude about the risk of inflation is clearly more hawkish.

Mussalem said he originally preferred the Federal Reserve to raise interest rates at the July policy meeting to further reduce inflation, which is still high. He believes that if interest rates are not raised further, the possibility that inflation will not fall back to the Fed's 2% target within the next 18 months is rising.

The Federal Reserve kept interest rates unchanged for the fifth consecutive meeting in July, and at the same time did not release a clear signal that interest rates would be raised in the near future. At the time, a total of three policy makers voted for interest rate hikes. Some regional Federal Reserve officials, including Mussalem, who did not have the right to vote this year, also indicated their preference for further tightening monetary policy.

By contrast, Daly's attitude was more cautious. She said that she supports the Federal Reserve's decision to keep interest rates unchanged in July, and has yet to see any clear signs that inflation is putting more widespread and lasting pressure.

Daly said that the recently released inflation and employment data did not significantly change her judgment on the economy. She anticipates that in the end, some of the price shocks brought about by tariffs, rising oil prices, and AI investments may only be temporary. With the current monetary policy still slightly restrictive, inflation is expected to resume its downward trend later.

As a labor economist, Daly also pointed out that there is currently no significant new inflationary pressure on the US job market.

In fact, a series of economic data released since the Federal Reserve meeting in July has lowered market expectations for short-term interest rate hikes. Inflation data for June and July showed that price pressure eased, while retail sales declined in July, and there was an unexpected decline in jobs in the job market.

Market expectations for the September rate hike have cooled down markedly as a result. Traders currently expect the probability that the Fed will raise interest rates in September to be about 30%, far lower than the level of over 70% at the end of July.