SpaceX, Broadcom, and Oracle are issuing massive amounts of bonds! The US bond market is "bursting," and "concentration is increasing, ultimately all affected by the AI cycle."

SpaceX, Broadcom, and Oracle are issuing massive amounts of bonds! The US bond market is "bursting," and "concentration is increasing, ultimately all affected by the AI cycle."

The AI arms race is pushing the US bond market to the brink. SpaceX, Broadcom, and Oracle have collectively sought over $150 billion in financing in less than a week. Coupled with Broadcom-Anthropic's $60 billion debt already on roadshow, the borrowing frenzy in the AI ecosystem has saturated the public bond market, forcing more and more transactions to move into private lending and off-balance-sheet special purpose vehicles (SPVs).

This wave of financing is reshaping risk pricing across the entire credit market. According to Bloomberg data, there have been nine mega-cap tech bonds (over $25 billion each) this year, a record high, making the tech sector one of the worst-performing sectors in the recent credit market. Meanwhile, Oracle's five-year CDS surged to a record closing high of 261 basis points, SpaceX's five-year CDS broke through 197 basis points, setting another record, and even Nvidia, the world's most valuable company, has its five-year default probability priced in by the market at over 7%.

Goldman Sachs credit strategist Rich Privorotsky characterized the situation as a “capital scramble” and warned that “the crowding-out effect could be huge” —AI borrowers are willing to borrow at high single-digit interest rates, putting upward pressure on U.S. Treasury yields, with the 10-year Treasury yield returning to 5.31% and the 30-year yield hovering around 5.70%.

Steven Kohlenstein, fixed income portfolio manager at T. Rowe Price, bluntly stated: "The risks are increasingly concentrated in a small group of companies, all ultimately pointing to the same AI investment cycle. Even if these risks are spread across different issuers, different sectors, and different financing structures, the correlation risks may not be fully reflected in the current valuations."

150 billion in one week: Three mega-deals emerge simultaneously

The scale and pace of this round of financing caught the market off guard.

According to the Wall Street Journal, Broadcom has been arranging over $50 billion in financing for OpenAI's custom AI chip project for the past few weeks, with Apollo and Blackstone among the companies being approached. Meanwhile, last week Broadcom initiated a syndicated distribution for Anthropic's $42 billion Class A senior secured bonds, with Blackstone separately leading a $18 billion Class B subordinated bond offering and contributing $9 billion of its own funds. Bloomberg confirmed the negotiations but noted that "no formal process has yet begun," and the two companies may be seeking "approximately $30 billion in debt as the next stage of financing."

According to the Wall Street Journal, Oracle is in talks with Apollo and Goldman Sachs to finance large-scale chip purchases through off-balance-sheet financing. The specific structure may involve external investors establishing independent companies to purchase chips, which are then leased back to Oracle. The purpose of this arrangement, reportedly, is to help Oracle "avoid borrowing more funds itself and control debt costs." The cost of Nvidia chips for a 1-gigawatt data center is approximately $50-60 billion, and Oracle hopes to complete the transaction this year.

SpaceX is seeking approximately $10 billion in bank loans and $30 billion in investment-grade bonds to purchase chips from Nvidia, with Apollo leading the effort and Pimco also in talks. It's worth noting that SpaceX completed its IPO in June at a valuation of $86 billion, and two weeks later issued $25 billion in bonds. If it raises another $40 billion, its total debt financing within four months will reach $65 billion, equivalent to 76% of its IPO proceeds.

Combining the three transactions, and including the Broadcom-Anthropic deal, the chip debt queued up in the AI ecosystem within about a week has exceeded $150 billion. The Oracle deal amount has not yet been disclosed.

The bond market is "overcrowded": the open market is nearing saturation, and private lending is taking over.

The public bond market is nearing its capacity limit, which is the fundamental reason why a large amount of financing in this round has shifted to private credit and SPVs.

According to Bloomberg data, investment-grade and high-yield bonds issued this year by hyperscale cloud service providers, data center, and AI infrastructure projects have reached at least $360 billion, accounting for 5.8% of total global bond sales, three times the 1.9% share last year . Goldman Sachs credit strategist Adam Crook uses a broader perspective, estimating total global AI-related debt issuance this year to be over $575 billion, with hyperscale cloud service providers accounting for only 40% of that.

The Wall Street Journal bluntly stated that cloud service providers have "issued hundreds of billions of dollars in bonds to push the public debt market to its limits" in their AI infrastructure development. This is why the new round of financing bypassed bond underwriting offices and was instead completed through private lending institutions such as Apollo and Blackstone in the form of a special purpose vehicle (SPV).

Off-balance-sheet debt is accumulating faster than on-balance-sheet debt. The special feature of chip SPVs is that their collateral is graphics processors, which depreciate much faster than buildings, and some structures are leased for 15 to 19 years with short-term bank loans. In essence, it is betting that companies like Oracle can refinance between 2028 and 2032 at the current interest rate spread.

Apollo has participated in all three of this week's transactions, and has previously been involved in Broadcom's financing platform established in June, xAI's Colossus financing, and Nvidia's $500 billion "computing power financing platform" launched in August.

CDS hits record high, credit risk repricing

The credit derivatives market reacts more directly than rating agencies.

According to Bloomberg, Oracle's five-year CDS rose about 10.5 basis points on Thursday to close at a record high of 261 basis points, with the market implying a five-year default probability of over 20%. SpaceX's five-year CDS jumped from about 181 basis points to 197 basis points, also a record high, up about 30% from mid-September and nearly double the approximately 110 basis points at the time of its June IPO— rating agencies still give it a BBB investment-grade rating, but the pricing in the CDS market has changed dramatically. SpaceX's 2056 bonds are currently trading at about 85 cents.

Oracle's creditworthiness is particularly noteworthy. Two weeks ago, Oracle's 2056 bonds plummeted to historic lows following the force majeure event surrounding Project Jupiter, with yields exceeding 8%, already lower than the average single-rated B junk bond. Its 1.3 gigawatt Wisconsin data center campus subsequently also ran into trouble. Of the approximately $80 billion in project debt supporting Oracle's leased data centers, several Jupiter loans have fallen to 89 to 91 cents.

Broadcom's five-year CDS extended by 3 basis points to 136 basis points on Thursday, also a record high.

Mark Clegg, a senior fixed income trader at Allspring Global Investments, stated:

“Every new financing announcement is like another bidder vying for investors’ balance sheets, resulting in interest rate spread volatility levels that were unimaginable a year ago. Some days it feels like the market is holding an emergency meeting every few hours to repric the scale of AI construction.”

Crowding-out effect spreads: Both government bonds and junk bonds come under pressure.

The spillover effects of the AI financing wave have spread from the technology credit market to a wider range of capital markets.

Reuters columnist Wayne Cole points out that "sovereign borrowers are no longer the big players in the market, and AI giants are increasingly encroaching on their territory." The prospect of competition in corporate bonds pushed the 10-year US Treasury yield back to 5.31% during Asian trading hours, while the 30-year yield hovered around 5.70%.

Goldman Sachs' Privorotsky explained the logic: "If you believe that scarce computing power can generate a 20% to 30% compound internal rate of return, you would be happy to borrow at a high single-digit interest rate to build it. But this puts enormous pressure on everyone else—consumers, small businesses, and even governments that built their balance sheets in the era of cheap capital. This may explain why real yields have been slow to decline."

The cracks in the junk bond market are becoming more pronounced. According to Goldman Sachs' credit sales strategy team, the dollar CCC-rated spread closed at 998 basis points on Wednesday, up 219 basis points in three months and 123 basis points in a single month, placing it in the 99th percentile over the past year, just 2 basis points shy of 1000 basis points. Meanwhile, the investment-grade index spread remained unchanged at 80 basis points.

JPMorgan's chief TMT expert, Brian Heavey, also pointed out this morning that SpaceX's bond financing "continues to put pressure on government bonds," and the Russell index has underperformed the Nasdaq in 17 of the past 20 trading days—which tells the same story in the stock market: go long on artificial intelligence and short everyone who needs a loan.

Two paths, one suspense

Goldman Sachs' Privorotsky attributes the current situation to a binary fork:

First, AI is generating enough organic cash flow to gradually achieve self-financing, making the next quarter's financial reports of hyperscale cloud service providers crucial; second, capital is being allocated to other sectors, and weak links in the economy are beginning to break down.

He added, "We may have already seen the beginnings of this process in the CCC spread."

Andrew Dassori, chief investment officer at Wavelength Capital Management, pointed out that companies have a huge and growing demand for computing power financing, but revenue growth faces the risk of slowing down as competition intensifies and potential regulations tighten. "The market is adapting to these conditions, and you can see this from the perspective of spread trends and volatility."

Currently, Oracle is considered the weakest link in the entire AI credit chain by the market—its own balance sheet can no longer support cheap financing, forcing it to "rent" Apollo's balance sheet. OpenAI and Anthropic have virtually no balance sheets to speak of, while SpaceX has knocked on the door of the capital market three times in four months.

A $50 billion loan arranged for a chip project called "Jalapeño" is perhaps the most vivid illustration of this AI funding frenzy.

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