NEW YORK — The wave of debt issuance funding the artificial-intelligence buildout is testing the limits of investor demand, with some large bond buyers warning that the market shows signs of indigestion.
While fund managers remain comfortable with the credit quality of companies such as Amazon and Google parent company Alphabet, they increasingly demand higher yields to accommodate the flood of issuance. This raised concerns that a tipping point could emerge if AI spending continues to escalate.
"You've started to see the indigestion show up in tech spreads in particular," said Neil Sutherland, head of U.S. fixed income at Schroders.
Tech corporate bond spreads are the extra yield investors demand to hold their debt over U.S. Treasuries; wider spreads signal higher perceived risk, while tighter spreads reflect stronger investor confidence.
Analysts cited Amazon's recent long-dated $25 billion bond sale, which priced at about 120 basis points over Treasuries. Last year, the spread would have been about half that, they said.
"Tech has gone from trading materially through the market to actually trading wider than the market," Sutherland said. "The higher spreads … make other parts of the market look more expensive on a relative value basis."
Alphabet declined to comment. Amazon did not respond to a request for comment.
Tech spreads are currently at 89 basis points, 9 basis points wider than the overall investment grade market, according to Karen Choi, portfolio manager at Capital Group.
The widening reflects a major change for a sector that historically enjoyed some of the tightest spreads in corporate credit due to strong balance sheets and relatively modest borrowing needs.
The surge in AI-related bonds, at a time when governments are still spending heavily, was a leading factor pushing up Treasury yields, as buyers demand higher returns to keep purchasing the flood of bonds hitting markets. Any pullback in tech issuance could support longer-dated Treasuries.
George Catrambone, head of fixed income, Americas, at DWS, said investors are beginning to demand larger concessions as issuance volumes reach record levels.
AI hyperscalers' debt issuance reached $220 billion this year, according to BNP Paribas data as of Aug. 10. That is about $207 billion higher than in the comparable period last year, when it totaled $12.5 billion.
Analysts said Alphabet's bond offering this month was well received but still required a concession of about 10 to 15 basis points relative to existing bonds.
"The issuance in January versus August looks different," Catrambone said, noting fatigue is setting in.
Earlier in the year, AI-linked deals were absorbed with little pushback from investors, but recent transactions needed more yield to clear, suggesting traditional investors are cautious at current spreads and maturities.
Catrambone also said the investment grade bond market underwent a major shift.Companies that once had smaller funding needs and issued mostly shorter-term debt now take on much larger amounts of borrowing and issue more long-term bonds to help finance AI-related spending. That created a wider range of bonds with different maturities.
Still, it is not alarming just yet, investors say. Hyperscalers continue to carry strong corporate ratings, equipped with substantial cash flows, analysts said.
Supply dynamics, though, are beginning to outweigh fundamentals, especially in terms of pricing bond deals.
Capital Group's Choi said foreign investors, pension funds and insurance companies so far absorbed some of the AI-related issuance. The investment grade corporate bond index currently yields about 5.4%, in line with long-term averages, helping support demand.
The bigger risk, however, may be less about overall demand and more about the practical limits facing institutional portfolios.
"It really depends on how much debt this market will take," Choi said.
Many pension and insurance investors cap exposure to individual issuers at about 2% to 3% of assets, she added. As the same handful of AI companies repeatedly issue debt, those limits become increasingly important.
The risk rises particularly if borrowing remains front-loaded. Choi said diversification is important to clients and many "don't want to open a statement and find they own 10% of one bond," highlighting the portfolio constraints that could eventually limit demand.
After years of enjoying seemingly limitless demand from bond investors, tech companies find that the market is now questioning how much it is willing to pay to finance the AI race.
"It's not a blank check," Catrambone said. "If these companies keep tapping the market over and over again, concessions are going to get larger and spreads are going to get wider."
