Why Are U.S. Treasuries Being Sold Off? St. Louis Fed President: AI Is Competing for Capital, Not a Question of Fed Credibility

Alberto Musalem, President of the Federal Reserve Bank of St. Louis, stated that the recent bond sell-off was primarily driven by increased government borrowing and rising financing demands from artificial intelligence (AI) development, rather than market doubts about the Federal Reserve's credibility.

In an interview with CNBC on Thursday, Musalem said: “There is capital competition between U.S. government financing and AI construction. Today, AI construction is securing funding both in the United States and globally.”

He added: “Interestingly, inflation expectations remain stable, and the Federal Reserve's credibility has not been questioned.”

Bond yields can also rise when investors doubt the Federal Reserve's resolve to curb inflation.

Musalem does not have a monetary policy vote this year. He reiterated that he had preferred to raise interest rates at the Federal Reserve's July meeting to bring down inflation, which remains elevated. He stated that he believes it is more likely that inflation will not return to the Federal Reserve's 2% target within the next 18 months if interest rates are not raised further.

Federal Reserve Officials held interest rates steady for the fifth consecutive time at the July meeting and gave no signal of a near-term rate hike. Three policymakers dissented, voting in favor of a rate increase. Some regional Fed officials without voting rights, including Musalem, have also indicated they would support a rate hike.

In recent weeks, investors have continued to sell off U.S. Treasuries, pushing the yield on the 30-year Treasury note to its highest level since 2007.