Is America Running Short of Cheap Capital?

For the past few years, discussion about the cost of capital has centered on the Federal Reserve. When will rates come down? How many cuts will there be? When do mortgages, business loans, and other forms of finance start getting cheaper again?

The bond market is raising a harder question: what if the price of capital is being pushed higher by something bigger than the Fed?

At the beginning of September, the yield on the 10-year U.S. Treasury briefly reached 4.818%, its highest level since November 2023. The 30-year Treasury had already touched 5.327%, a level last seen in 2007. Inflation is part of the story, as is the repricing of future monetary policy. But there is another force at work: an extraordinary amount of capital is being demanded at the same time, and somebody has to provide it.

Washington has a very large funding requirement

U.S. national debt passed $40 trillion in August. More useful than the headline number is the direction of travel. The Congressional Budget Office expects the federal deficit to reach $1.9 trillion this fiscal year, equivalent to 5.8% of GDP. Debt held by the public is projected at 101% of GDP in 2026 and 120% by 2036.

Interest alone is becoming an enormous line item, with the CBO expecting net federal interest expense of around $1 trillion this year and $2.1 trillion by 2036.

None of that means the United States is about to run out of buyers for Treasury bonds. It does mean those buyers can demand more.

Arif Husain, head of global fixed income at T. Rowe Price, captured the mood bluntly: if governments want the money, “it’s going to cost you a lot more.”

Part of the pressure is simple supply. Washington has a lot of bonds to sell. But the buyer base is also changing. Foreign central banks and other traditional buyers have historically been less sensitive to small changes in yield, while more price-sensitive investors, including hedge funds, are becoming increasingly important.

Federal Reserve research gives some idea of the scale. Gross U.S. Treasury exposure among large hedge funds doubled between 2023 and September 2025 to around $4 trillion.

So far, this is a fiscal story.

Then AI enters the picture.

Big Tech wants the money too

The AI boom is usually discussed as a technology story. It is fast becoming a capital-markets story.

Data centers are enormously expensive, as are the chips, power infrastructure, cooling systems, transmission capacity, and land needed to support them. Wall Street expects the largest technology companies to spend more than $730 billion on AI infrastructure this year, up from roughly $400 billion last year.

Their own cash reserves will not fund all of it, so they are borrowing.

AI-related debt issuance has already passed $220 billion in 2026, twice the total issued last year. Overall U.S. corporate bond issuance has reached $1.68 trillion, nearly 27% above the equivalent period in 2025. JPMorgan Private Bank believes AI-related issuance could reach the equivalent of half of U.S. Treasury coupon issuance by year-end.

The U.S. Treasury wants capital. Amazon wants capital. Microsoft and Alphabet want capital. So do a growing number of companies building the physical infrastructure underneath AI.

Many of those borrowers also arrive with huge cash flows, strong balance sheets, and very credible investment cases. Macquarie’s Thierry Wizman recently observed that some investors now see high-quality corporate debt as more attractive, on a relative basis, than Treasuries.

The competition is spreading beyond the U.S. too. American technology companies have raised around €40 billion in euro-denominated bonds, enough for the European Central Bank to examine whether hyperscaler borrowing could eventually begin crowding European companies out of parts of their own bond market.

Capital has not disappeared. There are simply more large borrowers competing for it.

What if the “normal” interest rate has moved?

Economists use the term R-star for the theoretical real interest rate at which an economy is neither being stimulated nor restrained. Nobody can observe it directly, and estimates vary considerably, but the direction has become interesting.

The New York Fed’s Laubach-Williams model currently puts U.S. R-star at 1.65%. In the first quarter of 2025 it was estimated at 1.36%.

Why might the equilibrium price of capital be rising? Two candidates stand out: government wants more capital, and business wants more capital.

Truist’s Chip Hughey points specifically to heavy AI investment and higher government debt as forces capable of increasing capital demand and pushing real yields higher. If that argument is right, the assumption that rates simply need to return to the extraordinarily cheap money of the 2010s becomes harder to defend.

Perhaps those rates were the exception. Perhaps investors now have enough competing uses for their money to demand more for supplying it.

UBS’s Ulrike Hoffmann-Burchardi makes the point plainly: the Fed cannot easily return interest rates to zero while structural demand for capital remains this high.

There is also a more optimistic reading.

High rates do not necessarily mean something is broken

Rising long-term yields are often interpreted as the bond market expressing concern about deficits and inflation. That is certainly part of the debate, but JPMorgan Private Bank has suggested another possibility: bond investors may also be anticipating stronger future productivity from the enormous investment being made in AI.

Higher productivity could support faster economic growth and better returns on capital. Investors may therefore be demanding more not only because government finances look worse, but because the private economy has more attractive uses for their money.

If AI eventually delivers the productivity gains its advocates expect, those gains could also become disinflationary. The same investment boom helping to push equilibrium rates higher today could ultimately help push them lower.

No one knows yet, and economists may need years of data before they can tell whether this is a structural shift or simply an unusually powerful investment cycle. Businesses making financing decisions today do not have the luxury of waiting for the answer.

Why should a private business care?

Most privately owned businesses will never issue a 30-year bond. But Treasury yields do not stay inside the Treasury market. They help set the benchmark for borrowing throughout the economy, feeding into corporate finance, mortgages, private credit, and the broader cost of capital.

A business with $10 million or $30 million in revenue therefore does not need to form a view on R-star. It probably does need to question one assumption:

Should its financing strategy depend on money becoming cheap again?

For much of the decade after the financial crisis, that was not an unreasonable expectation. When capital became expensive, central banks eventually eased and borrowing costs came back down.

The pressures today look different. Governments need enormous amounts of capital. AI infrastructure needs enormous amounts of capital. Energy, defense, grid infrastructure, and data centers need capital too, and investors have choices.

Rates do not have to remain permanently high for the old price of money to become a poor planning assumption.

And what does that mean for working capital?

If external capital remains relatively expensive, businesses have more reason to look closely at the capital they already control.

Inventory is capital. Equipment is capital. Accounts receivable are capital too.

A company that has completed $1 million of work but will wait 60 or 90 days to collect it has $1 million tied up in its operating cycle. Factoring is one way of releasing some of that capital earlier.

It will not always be the cheapest option, not every invoice should be factored, and the economics still need to make sense. But the question becomes more relevant if the era of exceptionally cheap money really is behind us:

Before going back to the market for another dollar of capital, what can the business do with the capital already sitting on its balance sheet?

The bond market cannot yet tell us whether today’s rates represent a temporary phase or a new equilibrium. It is giving businesses a good reason not to assume that cheap capital will simply return on schedule.