Prominent economist Mohamed El-Erian argues that hyperscalers and national governments are issuing a flood of bonds to sustain their rapid spending, while the pool of dependable buyers shrinks. That straightforward imbalance, he says, is pushing bond yields higher.

"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."

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

Tech giants fuel the AI buildout with borrowing

The latest chapter of the AI buildout is being financed by a borrowing binge among tech giants rather than drawing on their 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 pace of the AI buildout. By comparison, the five companies issued about $35 billion of debt annually from 2020 to 2024.

That near-quadrupling of corporate issuance matters for the broader market because high-grade corporate bonds and Treasuries compete for many of the same institutional buyers. When large volumes of new corporate debt arrive alongside heavy government borrowing, investors can demand higher yields across the board, and higher corporate borrowing costs can in turn feed back into how sustainable the AI spending spree looks to lenders and shareholders.

'Reliable buyers' of U.S. Treasuries are under strain

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

"What I do think is going on is that the reliable buyers and holders of U.S. Treasuries are under pressure," El-Erian told CNBC. "China, for geopolitical purposes, is no longer as willing. Japan and the Gulf countries have domestic issues."

Norway is also catching Wall Street's attention. On Friday, Norges Bank Investment Management — the body managing the world's biggest sovereign wealth fund — sent a letter to the Norwegian Finance Ministry proposing to cut the share of its portfolio held in government debt to 50% from the current 70%. According to Reuters, NBIM seeks to reduce its U.S. Treasury holdings by roughly $80 billion.

Indeed, the appetite of central banks and other price-insensitive buyers for U.S. government bonds is diminishing, and those next in line to buy are pushing for higher rates.

"Treasuries must increasingly be absorbed by price-sensitive buyers, such as households and investment funds, who react to ongoing fiscal indiscipline and inflationary pressures by demanding higher and higher interest rates for holding long-term debt," said Benn Steil and Yuma Schuster of the Council on Foreign Relations in a blog post.

The dynamic has drawn attention beyond bond desks. The question of who absorbs ever-larger volumes of U.S. debt has become a recurring theme in debates over U.S. fiscal policy, as federal deficits continue to add to the stock of debt the Treasury must refinance and roll over each year.

How unrest in the bond market affects consumers

The unsteadiness in the bond market is also set to drive up everyday costs in the U.S. It starts with the housing market, since mortgage rates usually trail the ten-year Treasury yield. Buying a new home in the U.S. has already been expensive and out of reach for many Americans given scarce inventory.

Auto loans are also affected by bond yields, particularly five-year Treasuries. Car payments averaged $770 per month in July, according to Experian. For some buyers, that means taking out a lengthier loan to better afford monthly payments.

Going forward, observers of the bond market will be watching the pace of further hyperscaler issuance, the outcome of Norway's proposal, and demand at upcoming Treasury auctions for signals of whether the supply-demand imbalance El-Erian describes is easing or deepening.

This article originally appeared on Moneywise. It provides information only and should not be construed as advice.