Tech’s AI Push Risks a Bond Market Blowback: Credit Weekly

tyl}0sn20y]}30c[u5o56avf_media_dl_1.png Bloomberg

Article content

(Bloomberg) — The biggest tech companies are gearing up to spend even more on artificial intelligence than investors had anticipated, and money managers increasingly fear that whatever happens, credit markets will get hit.

Article content

Microsoft Corp., Oracle Corp. and other “hyperscalers” are in an arms race to invest in AI and beat competitors in a technology that could change vast parts of the economy. Google parent Alphabet Inc. said it’s poised to spend as much as $185 billion on data centers this year, more than it has invested in the past three years combined. Amazon.com Inc. promised an even bigger outlay: $200 billion.

Article content

Article content

Article content

A chunk of those investments will come from the high-grade corporate bond market, potentially resulting in more debt sales this year than investors had expected. But the more tech companies borrow, the greater the potential pressure on bond valuations. The securities are already expensive by historical standards, trading at close to their tightest spreads since the late 1990s.

Article content

Article content

“The AI spending bonanza is finding buyers today but leaves little upside and even less room for error,” said Alexander Morris, chief executive officer and co-founder of F/m Investments. “There is no asset class that can’t and won’t spoil.”

Article content

Those fears weighed on tech companies’ notes this week, which broadly weakened relative to Treasuries, including most of the $25 billion of debt that Oracle sold on Monday. In the broader market, high-grade corporate bond yield spreads edged about 0.02 percentage point wider this week.

Article content

Beyond supply and demand, intensifying worries around AI’s power to disrupt have sparked tremors in the market. As companies like Anthropic PBC release a steady stream of tools targeting professional services from finance to software development, investors are starting to price in the threat AI poses to entire businesses. 

Article content

Article content

Software companies have seen their leveraged loan prices drop about 4% this year through Thursday, according to Bloomberg index data, amid fears that AI will leave many software products obsolete. 

Article content

Publicly traded lenders known as business development companies also have extensive exposure to software, with the industry accounting for more than 20% of portfolios on average, according to a note from Barclays. A BDC equity index fell 4.6% this week. 

Article content

In the high-grade and high-yield bond markets, software companies are comparatively less represented, accounting for around 3% of each, according to Barclays. Still, one factor that makes corporate bonds vulnerable to rising risks is valuations, which remain high even with recent weakening. 

Article content

The average US high-grade corporate bond spread was 0.75 percentage point at Thursday’s close, according to Bloomberg index data.

Article content

“Tight valuations make credit susceptible to potential disruption,” Barclays strategists Brad Rogoff and Dominique Toublan wrote in a Friday note. 

Article content

JPMorgan Chase & Co. in November forecast about $400 billion of high-grade US bond sales from the technology, media and telecom sector this year. But that figure could climb as companies’ spending plans increase.