The massive borrowing by tech giants like Microsoft, Amazon, Alphabet, and Meta to fund AI investments is significantly impacting the credit market. These companies, historically viewed as safe due to strong cash flow and low debt, have seen their combined debt increase by 60% over the 12 months ending in March, from $333 billion to $533 billion. This substantial issuance from highly-rated companies gives the impression that the corporate bond market is safer than it might otherwise be, as it pushes down average risk metrics. Goldman Sachs estimates that hyperscalers will spend about $5.3 trillion on AI infrastructure through 2030, with Barclays analysts expecting over $200 billion in debt issuance this year alone from these companies.
Despite the surge in AI-related debt, some experts, like Brij Khurana of Wellington Management and Todd Czachor of Columbia Threadneedle, do not believe it is currently crowding out other parts of the credit market or causing significant shifts in corporate bond spreads. Czachor notes that corporate bond spreads, as measured by the ICE BofA U.S. Corporate Index Option-Adjusted Spread, have remained stable at around 0.76 percentage points since the beginning of the year, indicating a strong appetite for corporate bonds, including non-AI related issuance. However, concerns exist that the increasing presence of passive credit funds, which buy bonds indiscriminately, could exacerbate market distortions.
While the bond market may not be showing immediate distress, the impact of AI borrowing is more visible in the stock market. The Invesco KBW Bank ETF has seen a 13.7% return this year, outperforming the S&P 500's 10.2% gain, while the Roundhill Magnificent Seven ETF is flat. This suggests banks are benefiting from underwriting fees and interest income from the borrowing boom. Conversely, Apollo Chief Economist Torsten Slok argues that this scale of borrowing is already crowding out demand for U.S. Treasurys and other fixed-income investments, a viewpoint that has not yet been widely corroborated by corporate bond market data. Fitch Ratings has also highlighted potential credit risks associated with AI, including increased corporate leverage and complex fund structures, alongside broader concerns about job displacement and tax revenue impacts in developed economies.
