Investors are witnessing an unintended consequence of the massive debt issuance by US technology companies, as the ripple effects push up risk indicators for some of the world's safest firms. Strategists at BNP Paribas describe these shifts as a knock-on effect of intensified competition for cash within the top-tier credit sector. With tech giants launching tens of billions of dollars in borrowing to fuel AI expansion, this rivalry has even inflated the cost of credit default swaps (CDS) for companies with no direct ties to data centers or artificial intelligence. While BNP Paribas did not disclose specific firms in its analysis, aggregated data shows that since the end of last year, default swap spreads for luxury giant LVMH, pharmaceutical maker Sanofi, and defense firm BAE Systems have risen by over 10%.
“All high-quality credit players are competing for capital with hyperscale tech companies,” said Josh Farber, head of European credit strategy at BNP Paribas, adding that sovereign debt could eventually be affected as well. The bank's analysis of the iTraxx Europe high-grade corporate CDS index suggests that the fight for investor funds may be creating a "super trend" where individual issuer spreads converge toward the index average. BNP Paribas has recommended a two-pronged trade strategy: buying a basket of low-spread names while selling index default protection. This trend is not immediately obvious from the CDS index's risk premium alone, which has narrowed to near its tightest levels in two decades, partly due to overcrowding in lower-rated credit segments that suppress their default protection costs.
At the top of the corporate bond market, the scramble for investor attention has become fierce. Meta Platforms, Alphabet, and Amazon have already issued tens of billions of dollars in bonds this year to fund AI expansion, with only Oracle falling below AA ratings among these hyperscale tech firms. The CDS index, which tracks a basket of components and trades independently of underlying single-name contracts, is among the most liquid tools in credit markets, with hundreds of billions of dollars in swaps traded daily for hedging or directional bets. The convergence of spreads toward the index average implies that if market conditions worsen, the buffer room for these key risk indicators will be significantly compressed. AI companies have become top-tier borrowers almost overnight, issuings bonds in markets like the UK, Japan, and Switzerland to fund rapid expansion, according to Farber, who sees this as a global phenomenon.
For some market participants, the surge in tech debt supply and its knock-on effects on spreads may be the catalyst needed to break the current calm in credit markets. “This is a real wake-up call compared to the past few years,” said Andrea Sementa, CEO of hedge fund Redhedge Asset Management. “The market, with spreads tightening and no volatility, cannot go on forever.” Global investment-grade corporate bond spreads currently stand at about 80 basis points, according to Bloomberg indices, only about 6 basis points above the post-financial crisis lows hit earlier this year. While corporate bond risk premiums and corresponding default protection costs usually move in tandem, the fight for capital is raising financing costs for safe-haven firms globally, inevitably pushing their CDS spreads higher. “If new issues from US companies see spreads widen, it could trigger a repricing across the entire investment-grade market,” Sementa added. Bankers underwriting new hyperscale tech debt have taken steps to ensure bonds perform well in the secondary market, such as avoiding fast-money buyers like hedge funds. However, Wall Street analysts generally expect more issuances from tech companies later this year or in 2025, which could further pressure existing bonds, their CDS, and the broader market. “The broader question is how investors should view these names with extremely tight spreads,” said Farber. “This is making the market realize that bearing risk at these levels offers very little return.”
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