Mohamed El-Erian says an influx of hyperscaler bonds is competing with U.S. Treasuries — and pushing rates higher

Prominent economist Mohamed El-Erian argues hyperscalers and national governments are issuing a flood of bonds to keep up their rapid spending velocity onto fewer buyers. Those straightforward circumstances are pushing bond yields up.

"If you look at the amount of issuance that's coming from governments, from hyperscalers, from companies, it far exceeds what you can count on in terms of reliable buyers, and that's why there's been pressure on interest rates, El-Erian told CNBC in an interview on Friday. "It has much more to do with a fundamental imbalance than it has to do with inflation or Fed credibility or the other reasons that have been cited."

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He continued: "This is simple supply and demand, and we have a massive increase in issuance by governments and hyperscalers."

Indeed, the latest chapter of the AI buildout will be fueled by a borrowing binge among tech giants instead of them drawing on cash flows. According to investment management firm Vanguard, five so-called hyperscalers —Alphabet, Amazon, Meta, Microsoft, and Oracle — have issued $132 billion in bonds so far this year to maintain the swift speed of the AI buildout. By comparison, the five companies issued about $35 billion of debt annually from 2020 to 2024.

What's fueling the current bond sell-off is simple: Investors want higher returns upfront in exchange for holding onto the U.S. government's debt. Investors are increasingly nervous about the fallout of the US-led war against Iran, which set off another wave of inflation particularly for gas prices. They're also wary about the rapid pace of AI development and whether the staggering spending levels will yield profits that match.