Wall Street is paying top dollar to buy insurance against tech giants like Meta and Alphabet defaulting on their debt, in a sign that AI spending is seriously worrying the bond market.
The five main data center operators -- Alphabet, Amazon.com, Meta Platforms, Microsoft, and Oracle -- are spending huge sums on the artificial intelligence buildout. While these companies generate massive amounts of cash, the spending threatens to overtake it. For 2026, the aggregate free cash flow of the five hyperscalers is estimated to fall to negative $2.8 billion, from $187 billion in 2025. In 2027, it's expected to fall to negative $41 billion, FactSet data show.
To fund their AI ambitions, companies are increasingly tapping the bond market. Roughly $236 billion of debt was issued globally through May to fund artificial intelligence endeavors, more than four times the amount issued during the same period in 2025, according to Morgan Stanley.
As a result of rising issuance, falling free cash flows, and uncertain payouts from AI investments, bond investors now think default risk is rising.
The cost to insure Google debt against default rose to 64 basis points on Tuesday, meaning a protection buyer must pay 0.63% of the face value of the bond annually over a five-year period. It's the biggest insurance premium in at least five years. The credit default swap, or CDS, for Meta and Nvidia's 5-year CDS were at 95 basis points and 80 basis points on Tuesday, levels not seen since at least November.
For those less concerned about AI spending, this might be a good time to step in. The fear of default has also pushed up spreads, meaning investors are getting that much more additional income to compensate them for the risk of holding the hyperscalers' bonds as opposed to Treasuries. Currently, investment-grade tech bonds offer 92 basis points over Treasuries, while on average investment-grade corporate bonds offer 81 basis points of additional yield.
"When you see widening at this level, but you still have confidence in the company, it's actually an opportunity for an active manager to add," says Joe Boyle, head of asset class specialists at Hartford Funds.
Some of these companies, such as Amazon and Meta, have other major businesses outside of AI, meaning these companies could still be on solid footing even if their AI investments don't pay off.
For the time being, however, it's clear that bond investors are getting increasingly nervous.
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