Massive "AI debt" stirs global markets

To fund the massive investments in artificial intelligence (AI), tech companies are pouring into the bond market at an unprecedented scale.

According to a Wall Street Journal report on November 23, since early September this year, so-called “AI hyperscalers”—including Amazon, Alphabet, Meta, and Oracle—have issued nearly $90 billion in investment-grade bonds.

Dealogic data shows this volume exceeds the total issuance by these companies over the previous 40 months. At the same time, lower-rated AI data center developers have issued over $7 billion in speculative-grade bonds.

This flood of bond supply has caught investors off guard, resulting in a broad decline in new bond prices. Some issuers have had to pay higher-than-expected interest rates to attract buyers. Tight market sentiment has rapidly spread, and signs of weakness in the bond market, coupled with worries about deteriorating credit metrics for related companies, are now transmitting to the stock market—intensifying investor anxiety over high valuations in AI concept stocks.

“Today's markets are highly interconnected,” said John Lloyd, Global Head of Multi-Sector Credit at Janus Henderson Investors. “If AI stocks are sold off, it’ll be tough for credit markets to do well, and vice versa.” This negative feedback loop between the bond and stock markets is becoming a new risk point investors must watch.

Meta’s corporate bonds keep falling, Oracle’s bond yields soar

In this wave of AI financing, not all companies face equal pressure. Alphabet, Amazon, and Microsoft, thanks to the massive cash flow they generate each quarter, can fund most of their AI spending internally, so they’re relatively less affected by bond market volatility.

Other companies are in a more delicate position. Although Meta is also a tech giant, its cash reserves are slightly less robust, and the market generally believes it needs more debt to support its ambitious AI vision. Reportedly, when Meta issued $30 billion in bonds at the end of October, the yields it offered were noticeably higher than those on its existing bonds. After issuance, some of those bonds continued to fall in price on the secondary market, with yields climbing even higher, so its double-A rated bonds now yield roughly as much as the lower-rated bonds of IBM.

Oracle’s situation is even more challenging. The company is already burning cash, and plans to invest billions more in the coming years as it seeks to transform itself from a software giant into an AI cloud giant.

Currently, its rating is only two notches above speculative grade, and its bond yields are higher than almost all other investment-grade tech peers. Jordan Chalfin, senior analyst at research firm CreditSights, notes that Oracle may need to issue about $65 billion in bonds over the next three years, and maintaining an investment-grade rating is critical—since the speculative-grade market just isn’t big enough to support its needs.

Warning signs from speculative-grade bonds: risk is spilling into the stock market

In the riskier speculative-grade market, the warning signs are even clearer. CoreWeave, as one of the few major AI cloud providers with sub-investment-grade bonds, is a prime example.

Reportedly, the company’s bonds maturing in 2031—which were issued in July—have recently traded at just 92 cents on the dollar, with a corresponding yield as high as about 11%, similar to the average yield for the lowest-rated CCC bonds.

Investors point out that CoreWeave faces capital needs similar to those of the giants, but lacks the strong traditional businesses the giants have to cushion the blow. Recent news of delays in its data center construction sent its share price down 41% this month. This shows that for such companies, market concern over their execution risk and financing ability is mounting sharply.

Bond market pressure is influencing market sentiment through multiple channels. For example, the recent rise in trading volume for Oracle’s credit default swaps (CDS) has drawn widespread attention on Wall Street, and is considered a factor behind the company’s 24% share price drop this month.

Most investors believe that the bond market selloff alone isn’t enough to slow the big tech companies’ AI expansion plans, as funding is not a problem for them. However, for speculative-grade tech companies, the rising cost of financing could eventually influence their investment decisions. AllianceBernstein’s head of credit, Will Smith, says: “Investors generally demand a higher risk premium, which means the growth curve may not be a straight line.” He believes the market will require that only “smart projects” with sensible structure and proper capital costs will get funded.

Wall Street expects these companies could issue $20 billion to $60 billion in bonds next year. If financing costs keep rising, actual issuance may be at the low end of that range.

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