Bond giants are buying bonds to prepare for the bursting of the AI bubble.

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Credit bond giants DoubleLine Capital and Oaktree Capital are preparing in advance for a possible AI bubble burst—by buying bonds that can survive through a deep credit cycle.

“How likely is an AI bubble? I’d say about 100%,” said Robert Cohen, a fund manager at DoubleLine Capital, at the Bloomberg Global Credit Forum on Wednesday.

Massive Surge of AI-Related Debt Hitting the Market

The amount of debt issued due to AI infrastructure construction is rapidly expanding.

According to a Barclays report on May 21, U.S. big tech companies have issued over $155 billion in unsecured bonds worldwide so far this year—more than 45% above last year’s total issuance. Bloomberg Intelligence forecasts that corporate capital expenditure on AI will reach about $5 trillion over the next five years, with a large portion coming from debt financing.

Financing beyond the super tech companies is also booming. Just this week, data center company Hut 8 issued around $4 billion in investment-grade bonds to finance its Texas project, with the Nvidia-linked bonds being oversubscribed four times; a $3.6 billion bond offering to help AI model developer Anthropic purchase chips is also nearing completion.

“What Kind of Credit Bonds Can Survive a Deep Cycle”

Amid this wave of debt, no asset manager can turn a blind eye. But Cohen believes that although bond prices and valuations are not yet overheated, as tech companies continue to pour capital into AI, there is no doubt that bubble-like levels will be reached in the coming months or years.

The core challenge of investing in AI-related debt is: many bonds on the market only mature decades from now, by which time today’s technologies may be obsolete. Data centers are especially at risk of overbuilding—the construction cycle is long, and many projects are launching simultaneously.

“You have to think about what kinds of credit bonds can survive a deep cycle,” said Cohen. “What you need are those that can survive through structural arrangements or a strong balance sheet.”

Cohen defines a credit bubble as when investors provide financing to companies that need real growth to pay off their debts. Historically, technology booms often become bubbles in this very way.

Buy, But Be Selective

Oaktree Capital’s strategy is similar—even if it’s not clear when the bubble will arrive, they are already investing based on the premise that speculation may become excessive in the future.

Christina Lee, co-portfolio manager of Oaktree Capital’s private credit division, said that data center financing is a huge and growing opportunity, “but we have to be very selective because it’s still not clear who the winners and losers will be in this race.”

Oaktree Capital co-founder Howard Marks warned in a note last December: “No one should go all-in without acknowledging the risk of ruin. But likewise, no one should simply stand aside and miss out on a great technological leap.”

Dan Ivascyn, group CIO at PIMCO, is more cautious. He said that AI is not a sector to overweight, but precisely because funding demand is huge, “You can keep a defensive overall exposure while unlocking enormous value.” He also warned that in the event of default, losses may exceed investors’ previous experience. With large amounts of debt continuing to flood in, PIMCO hopes to use its size to capture truly attractive opportunities.

Bridgewater Associates founder Ray Dalio pointed out on Bloomberg TV this week that major technology revolutions in history are always accompanied by speculative excess. The dilemma for companies is: “Either spend big to fight for market share, regardless of overpaying; or spend too little and hand over the market to others.”

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