Silicon Valley is frantically borrowing money, and the market is aggressively selling off.
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The AI financing frenzy of tech giants is facing a cold reception from the bond market.
According to MarketAxess data, prices of AI-related bonds with maturities of 10 years or more have continued to fall this cycle, becoming one of the worst-performing bonds in the investment-grade bond market.
The case that best reflects market sentiment comes from Amazon. On Tuesday, the company issued $25 billion in bonds, but demand for long-term bonds was weak. According to the Financial Times, citing informed bankers and investors, orders for the five-year bond exceeded those for the 30-year bond by about 20%.
Additionally, the yield on a 30-year SpaceX bond rose from 6.7% at issue less than two weeks ago to 7.3%.
According to Bank of America Global Research, bonds issued by the five major hyperscale cloud service providers—Amazon, Google, Meta, Microsoft, and Oracle—currently yield about 0.6 percentage points more than blue-chip bonds of the same rating and maturity. This risk premium is the highest among all sectors in the investment-grade market.
Oversupply Crushes Demand
The direct trigger for this selling wave was the unprecedented bond issuance spree by tech companies for the AI arms race.
According to Bank of America Global Research statistics, since the beginning of the year, cross-currency issuance of high-grade AI-related bonds has reached $270 billion, nearly double that of the whole previous year.
The continuous influx of new bonds has sharply increased investors’ portfolio pressures.
John Lloyd, Global Head of Multi-Asset Credit at Janus Henderson, stated that as many portfolios already hold large amounts of AI-related debt, investors must sell some existing hyperscale cloud service provider bonds to make room for Amazon’s new issuances. He said:
You have to offer a large enough concession to attract us to participate in new bond issuances.
Recent sharp volatility in tech stocks has also dampened market sentiment.
John Lloyd added that some investors already have significant exposure to the tech sector in their equity portfolios, which may further reduce their willingness to add related risk exposure in the bond market. Goldman Sachs chief credit strategist Amanda Lynam expressed a similar view.
Uncertainty Over Long-Term Returns Shifts Investors to Short End
Pressure is concentrated on long-term bonds, with the underlying logic being fundamental doubts among investors about long-term returns on AI capital expenditures.
Mariya Entina, portfolio manager at DoubleLine, stated:
Buying 30-year bonds usually requires companies to have extremely stable prospects and clear investment returns, and the long-term profitability of AI capital expenditures remains uncertain.
She said her institution prefers to take nearer-term risks.
Pramod Atluri, portfolio manager at Capital Group, also favors short-maturity hyperscale cloud service provider bonds. Atluri said:
Technical iteration is so fast that long-term borrowing turns into a much riskier proposition. There is no way to predict what the industry will look like ten years from now.
Mariya Entina further pointed out that the main buyers of long-term bonds are usually insurance companies and pension funds, which need to match long-term liabilities. Their investment styles are typically conservative and have lower tolerance for such uncertainties.
High-Rate Environment Adds to Woes
The appeal of hyperscale cloud service providers' long-term bonds has been further eroded by the high yield levels on short-term U.S. Treasuries.
Inflation remains above target, and market expectations are for Fed policy rates to stay "higher for longer"—especially after new Fed Chair Walsh sent a hawkish signal at last month’s inaugural meeting, short-term U.S. bonds are now offering considerable yields.
An analyst specializing in high-grade credit said:
If you can lock in attractive yields without having to move far out on the yield curve, why take more risk?
Currently, the short-term borrowing costs for hyperscale cloud service providers remain steady, indicating no concerns in the market about their near-term debt repayment abilities. But investors are showing in practice that: the bond market is far more cautious than the stock market about whether the AI buildout can deliver on its long-term promise.
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