AI bond surge overtakes banks in US credit risk
A surge in long-dated borrowing to fund artificial intelligence is giving big technology companies more influence over US corporate bond market risk than the largest Wall Street banks, raising concerns about concentration and returns.
Bond sales by the largest US technology companies to fund artificial intelligence infrastructure now account for a greater share of portfolio risk in the high-grade corporate market than debt from the biggest banks. According to a July 23 analysis by Barclays strategists, the six largest tech firms represent 8.6% of the market's duration times spread (DTS), exceeding the 7.3% share held by the six largest banks.
This outsized influence on risk stems from the maturity profile of the debt rather than its sheer volume. Hyperscalers like Alphabet, Amazon.com Inc. and Meta Platforms Inc. account for only about 4% of outstanding principal, compared to 9% for major banks. However, tech firms favor longer-dated bonds, with 43% of their issuance over the past year exceeding 10 years, compared to roughly 23% for other non-financial companies.
The influx of supply is straining investor demand and widening spreads. Investment-grade tech bond spreads have widened to 89 basis points from 76 basis points at the start of the year. Some long-dated hyperscaler debt is already trading at spreads close to BB rated junk bonds, despite carrying top investment-grade ratings.
Recent deals reflect this cooling appetite. A $25 billion offering from Amazon received a cooler reception, while SpaceX bonds weakened sharply in June. BlackRock is also seeing weak demand for $12.3 billion in bonds tied to a Meta data center campus in Texas.
Barclays projects hyperscalers will issue roughly $285 billion in investment-grade debt globally this year. Alphabet recently fueled market anxiety by raising its capital spending forecast to as much as $205 billion. Earnings reports from Meta, Microsoft Corp. and Amazon in the coming week are expected to trigger another wave of issuance.
“As more AI-related debt is issued at spreads wide of the broad index, there is potential for this supply pressure to drag index spreads wider,” said Daniel Belton, a fixed income portfolio manager at Aegon Asset Management. This credit concentration is compounding existing macro pressures, such as Middle East geopolitics.
“On the current issuance trajectory, spillover to the broader index looks inevitable,” Barclays strategists Dominique Toublan and Andrew Keches wrote. They warned that as the market allocates capital to tech, capacity for other issuers will shrink. “At that point, concentrated supply pressure becomes an index-level problem,” they noted.
“Whenever you have an industry gaining in share as a proportion of your universe, you have more concentration, and concentration is usually a negative,” said Mariya Entina, a portfolio manager at DoubleLine. “The next few years they’re set to issue more than they even issued this year, so I really don’t see that turning around for us anytime soon.”
