Goldman Sachs warns: The AI debt market has entered the "eye of the storm," and will face even greater shocks after a brief respite.

The AI infrastructure construction boom is creating an unprecedented supply storm in the credit market, and the current calm is just a brief respite in the eye of the storm.

In his latest report, Goldman Sachs fixed-income credit trader and investment-grade credit expert Jeffrey Papai warned that after approximately $300 billion in AI-related bond issuance this year, supply will slow significantly in the fourth quarter, providing a brief respite for AI credit spreads. However, this respite will be extremely short-lived—he predicts that bond issuance by hyperscale cloud computing companies and chip manufacturers will increase by about 40% in 2027 compared to 2026, reaching approximately $340 billion, at which point the market will face even greater shocks.

This warning comes against the backdrop of AI debt expansion beginning to exert competitive pressure on the US Treasury market. According to estimates by Michael Cembalest of JPMorgan Chase, by 2026, the combined debt issuance of the five largest hyperscale cloud computing companies plus Nvidia will reach approximately $320 billion (including data center leases and special purpose vehicles), of which the long-term portion will be equivalent to approximately $303 billion in ten-year maturity, representing 68% of the US Treasury's new long-term borrowing during the same period.

Fourth Quarter: A Brief Calm in the Eye of the Storm

Papai points out that the approximately $300 billion in AI supply this year has made it the most important theme in the investment-grade credit market. Entering the fourth quarter, only one hyperscale cloud computing senior bond and a small number of data center transactions are expected, marking the lowest issuance volume since the start of this AI construction boom, approximately 50% lower than any comparable period.

Against this backdrop, he holds a short-term tactical bullish stance on the Goldman Sachs AI Credit Basket (GSUCIABK), believing there is a rebound opportunity for narrowing spreads in the next one to two months—the basket is currently less than 10 basis points away from its historical widest level, and a slowdown in supply will provide support.

However, Papai explicitly emphasized that this assessment is limited to the tactical level. He advised investors to reduce positions on rallies rather than chase the market, as AI credit spreads remain structurally underweighted for an extended period. Over the past year, AI spreads have widened by more than 50 basis points, and with a new wave of supply approaching in 2027, renewed pressure is highly probable.

2027: An even bigger wave of supply is on the way.

Papai has provided a rough estimate of the scale of bond issuance by hyperscale cloud computing companies and chip manufacturers in 2027, and specifically noted that this is not an official forecast by Goldman Sachs, but an extrapolation based on current trends.

Its core assumptions include : capital expenditures by hyperscale cloud computing companies will reach approximately $930 billion in 2027 (the median of forecasts from Goldman Sachs Research and Bloomberg); the proportion of debt financing in capital expenditures will rise from approximately 30% in 2026 to 37.5%, due to the expected contraction in equity financing for this group; the proportion of dollar financing will decrease from approximately 80% to 70%; and advanced chip debt will increase from approximately $35 billion in 2026 to between $50 billion and $75 billion.

Based on the above assumptions, the average quarterly issuance volume in 2027 will be equivalent to the level of the busiest quarter to date. More noteworthy is that the debt maturing in 2027 and 2028 for hyperscale cloud computing companies and chip manufacturers is only about $45 billion, far lower than that of high-issuance industries such as banks (which alone have about $180 billion maturing in 2029 excluding TLAC callable bonds). This means that the demand replenishment from refinancing of maturing debt is extremely limited, and the new supply will almost entirely rely on the market to absorb it.

Furthermore, Papai pointed out that if data center and other AI-related issuances are included in the statistics, the overall scale will expand further. He also considers structured chip financing to be the area with the largest potential for growth, potentially exceeding $100 billion, but due to the opaque structure and unpredictable timeline, a specific estimate cannot be given at present.

Non-AI investment-grade bonds: facing relative pressure in the near term

In contrast to the brief respite in the AI sector, Papai believes that non-AI investment-grade bonds are relatively vulnerable in the near term. An estimated $230 billion in non-AI investment-grade bonds is expected to flood the market in September, putting pressure on the sector.

However, he also pointed out that overall yield-driven demand for investment-grade bonds remains strong, and the supply duration is expected to be short. Therefore, he suggested that investors view any declines in non-AI investment-grade bonds (GSIG30NH) in the coming weeks due to supply shocks as buying opportunities.

From a broader perspective, although investment-grade credit spreads have widened throughout the summer, they have not yet broken out of their range—the investment-grade index spread is about 80 basis points, higher than the year-to-date average of 77 basis points; the GS100 spread is about 99 basis points, higher than the average of 96 basis points.

Structural changes in the credit market: The scale of risk transfer has expanded dramatically.

The report also highlighted that the scale of risk transfer within the credit market is increasing significantly and involves multiple product lines, a trend that will accelerate further in 2027.

The credit default swap (CDS) market is experiencing a significant recovery. Papai reports that several relationship managers who last traded CDS before the global financial crisis have recently re-inquired about prices, indicating a clear rebound in market participants' demand for hedging instruments. After nearly 15 years of continuous decline, CDS trading volume is expected to grow by approximately 15% each in 2025 and 2026.

Meanwhile, total return swaps (TRS) continued their rapid growth, and trading volume in cash bonds also hit a record high, with both investment-grade and high-yield bond trading volumes increasing by 10% to 15% year-on-year. Papai believes that as structured chip and data center financing expands—these types of financing have shorter durations and higher hedging needs—these trends will be further strengthened, and CDS traders may become one of the most sought-after jobs on Wall Street in 2027.

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