“Leading indicator of the ‘AI bubble’—U.S. cloud companies’ bonds face continuous sell-off”
```
Investor concerns about large tech companies' AI spending have now spread to the bond market. The debt spread of hyperscale cloud computing companies has hit a multi-month high, which may be a "leading indicator" of a risk reassessment for the entire AI narrative.
The latest trigger is Barclays’ downgrade of Oracle’s debt rating. As previously mentioned by Wallstreetcn, on November 11, Barclays warned that Oracle’s massive capital expenditures to fulfill its AI contracts have far exceeded the support capacity of its free cash flow, forcing the company to rely heavily on external financing.
The impact is not limited to a single company. According to Bank of America data, the yield spread over U.S. Treasuries for a basket of bonds issued by so-called "hyperscalers"—companies building massive data centers such as Alphabet, Meta, Microsoft, and Oracle—has climbed to 0.78 percentage points.
This is the highest level since market turmoil triggered by the Trump administration's tariff plans and is much higher than the 0.5 percentage point spread in September, signaling a broad repricing of risk in the industry.
This sell-off is directly related to the recent financing spree of tech giants. Over the past seven weeks, tech companies have issued more than $120 billion in bonds, mainly to fund data center construction. The massive scale of investment has raised market concerns over overcapacity, long-term profitability, and energy demand.
Oracle: The "Canary" Under Debt Pressure
In this credit market turbulence, Oracle's situation stands out, serving as a microcosm of the stress facing the entire industry. Barclays downgraded its debt rating to "Underweight," equivalent to a "Sell" recommendation, and warned that it may ultimately slip to a BBB- rating, just one notch above junk status.
Barclays analyst Andrew Keches predicted in a report that Oracle will face a severe funding gap starting in fiscal 2027 (beginning June 2026), and may run out of cash by November 2026. The crux of Oracle's predicament is its high leverage ratio. Data shows Oracle’s debt-to-equity ratio is as high as 500%, while Amazon’s is 50%, Microsoft’s 30%, and Meta and Google’s are even lower.
Secondary market performance of Oracle bonds has also reflected investor concerns. According to an index compiled by the Financial Times, the price of Oracle’s outstanding bonds has fallen nearly 5% since mid-September, whereas the ICE Data Services index tracking high-rated US tech bonds fell only about 1% over the same period. Credit rating agency Moody’s also previously pointed out that Oracle’s growth relies too heavily on large commitments from a few AI firms (such as OpenAI), which poses material risks.
Trillions in Capital Demand: Spillover of Pressure from Tech Giants to the Credit Market
Oracle’s predicament is not an isolated case, but rather one facet of the pressure facing the entire industry amid the AI investment boom. JPMorgan’s strategist team has warned that building AI infrastructure will cost over $5 trillion, requiring “every public capital market and also private credit, alternative capital, and even government involvement.”
To support this round of expansion, tech giants are issuing bonds at a rapid pace. Although these companies combined hold about $350 billion in cash and investments and are expected to generate about $725 billion in operating cash flow by 2026, they are still opting for large-scale borrowing. Investors worry this could mark a shift for the tech industry from conservative financial policies to a more leveraged operational model.
Several recent large-scale deals have exacerbated market jitters:
Meta completed a $30 billion bond issuance at the end of October, the largest corporate bond deal since 2023. Previously, the company also secured a $27 billion private debt agreement to fund its data center construction.
Alphabet issued $25 billion in bonds in early November.
Oracle sold $18 billion in bonds in September to fund infrastructure leases, including construction of the "Stargate" data center for OpenAI.
Healthy Correction or Long-term Warning?
Credit market pressures are being transmitted down the AI industry chain, with some smaller key players also feeling the chill. Shares of data center operator CoreWeave have fallen more than 20% over the past two weeks, in tandem with the sell-off in large tech bonds.
Reportedly, CoreWeave recently lowered its annual revenue forecast due to expected delays in data center construction, pushing its stock price down further. Meanwhile, according to LSEG data, the cost of insuring the company against debt default has risen sharply, with its five-year credit default swap (CDS) spread surging from below 350 basis points in early October to 505 basis points.
However, not everyone believes the bond market sell-off is bad news. Some analysts believe that a price correction after such a large supply of bonds is a healthy market response.
Bespoke Investment Group macro strategist George Pearkes told the Financial Times: “As long as the market continues to price in incremental risk, that’s a good sign. What worries me would be the market rising instead of selling off when new supply hits.”
Risk Warning and DisclaimerThe market carries risk, and investment requires caution. This article does not constitute individual investment advice, nor does it take into account the individual investment objectives, financial situations, or needs of specific users. Users should consider whether any opinions, views, or conclusions in this article fit their particular circumstances. Investment based on this is at your own risk. ```