One long-feared downside of a ballooning national debt was that the federal government would absorb so much capital that private businesses would be starved of financing — a phenomenon economists call "crowding out." Yardeni's argument inverts that script: this time, it is corporate borrowers in the AI build-out who are pulling capital away from the government.

The numbers today are stark: U.S. debt stands at $40 trillion, the federal budget deficit is on track to reach $2 trillion this fiscal year, and debt servicing costs alone run $1 trillion a year. That is an enormous amount of money the Treasury Department must raise from the bond market — the same market that serves as a key source of financing for corporate giants. Treasury yields, in turn, anchor borrowing costs across the economy, from mortgages to business loans, which is why any sustained upward pressure on them matters well beyond Washington.

Yet AI hyperscalers — the largest technology companies building out AI infrastructure — have so far had no trouble issuing plenty of debt of their own as they race to buy chips, build data centers and lay down other infrastructure.

Even Treasury Secretary Scott Bessent, who has billed himself as America's top bond salesman, has noted how eagerly AI companies are offering debt regardless of the cost of borrowing.

"We are also seeing big corporate issuance. And a lot of that corporate issuance, I would say, is almost yield-agnostic, because the build-out for AI, the returns on that, the companies believe they're going to be so high. They don't really care what they're paying," he said recently.

According to Wall Street veteran Ed Yardeni, U.S. investment-grade corporate bond issuance totaled about $1.7 trillion in the year to date through July — roughly 27% above last year's pace and on track to exceed $2 trillion for the first time.

A flood of corporate debt of that magnitude would normally require yields to offer a bigger premium over risk-free bonds in order to attract enough buyers. But demand for AI-related bonds has been so high that the yield spread has remained compressed, barely widening for an additional premium, Yardeni pointed out in a note on Monday.

"As a result, the market has adjusted not through higher corporate borrowing costs relative to Treasuries but through higher Treasury yields themselves. Capital flowing into corporate bonds is capital not flowing into Treasuries, and Treasury yields have had to rise to clear the market," Yardeni explained. "In short, the AI revolution is producing a classic crowding-out effect, causing Treasury yields to rise."

Higher yields could eventually fuel a feedback loop in which rising debt-servicing costs expand deficits further, adding to the pile of U.S. debt, which in turn pushes yields up even more.

To be sure, the rise in Treasury yields has been attributed to a variety of factors beyond the AI borrowing spree. These include massive federal budget deficits with no end in sight, higher oil prices due to the Iran war, and a robust U.S. economy continuing to put upward pressure on inflation.

Yardeni also noted that international capital-flow data show net purchases of U.S. corporate bonds by private-sector foreign buyers have exceeded their purchases of Treasury debt over the past year.

Jurrien Timmer, director of global macro at Fidelity Investments, said on X: "The reverse crowding out in the corporate bond market has even gotten the Treasury Secretary's attention."

It has gotten Federal Reserve Chairman Kevin Warsh's attention as well. In his speech at the Jackson Hole conference on Friday, he acknowledged the debt boom, saying, "Ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts."

Meanwhile, private credit is also financing the AI boom, and chipmaker Nvidia is even leveraging its balance sheet to back AI deals. So-called hidden borrowing — off-balance-sheet financing vehicles such as data-center SPVs — has exploded as well, with one tally putting it at $1.65 trillion.

Still, markets are showing signs of fatigue after absorbing the flood of debt in such a short time, S&P Global warned last month, noting that hyperscalers are paying a higher premium compared with yields on risk-free bonds.

"Market participants are growing leery of quickly rising leverage from issuers previously characterized by strong and reliable cash flow," the report said.

The debate bears watching on several fronts: whether Treasury auction demand stays robust as corporate issuance continues at record volume, whether spreads on AI-related bonds widen further from here, and how regulators and ratings agencies respond to the growth of hidden borrowing tied to data-center finance.

This story was originally featured on Fortune.com.