The bond market is turning a cold shoulder to the AI financing frenzy of major technology companies.
According to MarketAxess data, AI-related bonds with maturities of 10 years or more have seen their prices fall this week, ranking among the worst performers in the investment-grade bond market.
A prime example of the market's sentiment came from Amazon, which issued $25 billion in bonds this Tuesday but saw tepid demand for its long-dated debt. The Financial Times, citing informed bankers and investors, reported that order books for its five-year bonds were about 20% larger than those for its 30-year bonds.
Furthermore, the yield on a 30-year bond from SpaceX has climbed to 7.3% from its issue price of less than 6.7% just under two weeks ago.
According to Bank of America Global Research, bonds issued by the five major hyperscale cloud providers—Amazon, Alphabet (ASX: GOOG), Meta Platforms, Inc. (ASX: META), Microsoft (ASX: MSFT), and Oracle—currently offer yields about 0.6 percentage points higher than those of blue-chip bonds with similar credit ratings and maturities. This risk premium is now the highest among all sectors in the investment-grade market.
Supply Overwhelms Demand
The immediate trigger for this wave of selling is the unprecedented surge in bond issuance by tech companies to fund the AI arms race.
Bank of America Global Research statistics show that cross-currency issuance of high-grade AI-related bonds has reached $270 billion so far this year, nearly double the total for all of last year.
The continuous influx of new debt has sharply increased the pressure on investors' portfolios.
John Lloyd, Global Head of Multi-Sector Credit at Janus Henderson, stated that because many portfolios are already heavily invested in AI-related debt, investors are being forced to sell their existing holdings of hyperscaler bonds to make room for new issuance from companies like Amazon. He said:
You have to offer a sufficiently large concession to attract us to the new issue.
Recent sharp volatility in technology 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 in the bond market. Amanda Lynam, Chief Credit Strategist at Goldman Sachs Research, shares this view.
Investors Favor Shorter Maturities Amid Long-Term Doubts
The selling pressure is concentrated on the long end of the curve, driven by a fundamental skepticism among investors about the long-term returns on AI capital expenditure.
Mariya Entina, Portfolio Manager at DoubleLine, stated:
Buying a 30-year bond typically requires a company to have a very stable outlook and clear investment returns, but the long-term profitability of AI capital spending is currently in question.
She indicated that her firm prefers to take on nearer-term risk.
Pramod Atluri, Portfolio Manager at Capital Group, also favors shorter-dated hyperscaler bonds. Atluri said:
The pace of technological change is so rapid that long-term borrowing becomes a much riskier proposition. It's simply impossible to predict what this industry will look like ten years from now.
Mariya Entina also noted that the primary buyers of long-term bonds are typically insurance companies and pension funds, institutions that need to match long-term liabilities. Their investment style is often more conservative, and they have a lower tolerance for the aforementioned uncertainties.
High-Interest Rate Environment Adds to the Pressure
The appeal of long-term hyperscaler bonds is further diminished by the current high yields available on the short end of the U.S. Treasury curve.
Persistent inflation above target levels, coupled with market expectations that the Federal Reserve will keep policy rates "higher for longer"—especially after new Fed Chair Wash signaled a hawkish stance at his first meeting last month—has made short-term Treasuries offer quite attractive yields.
An analyst focused on high-grade credit said:
Why take on more risk if you can lock in an attractive yield without having to go too far out on the yield curve?
Currently, the short-term borrowing costs for hyperscale cloud providers remain stable, indicating no market concern about these companies' near-term debt repayment capabilities. However, investors are voting with their feet, showing that the bond market is far more cautious than the equity market about whether this wave of AI infrastructure spending will deliver on its long-term promises.
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