High-rated technology companies are issuing substantial amounts of debt to fund their artificial intelligence initiatives. This surge in corporate bond issuance has seen offerings reach almost $1.5 trillion year-to-date, marking a 36% increase from the previous year. This borrowing binge by "tech hyperscalers" is a significant factor in keeping US Treasury yields elevated.
The influx of debt from companies like Amazon.com Inc., Meta Platforms Inc., and Alphabet Inc., which are predominantly rated in the AA tier, has actually improved the average rating of Bloomberg's US investment-grade bond index. AA and A-rated bonds now constitute 52% of the index, up from approximately 46% in 2021, according to a Barclays Plc analysis. However, some investors are concerned that this apparent safety might be deceptive, as the sheer volume of debt could mask underlying risks.
Despite these concerns, Wall Street is embracing these high-yielding AI bonds. The era of cheap money has ended, with the bond market signaling to CEOs that borrowing costs are on the rise. This environment, characterized by rising yields, is attracting income investors, including those who traditionally seek out high-yield, or "junk," bonds. The higher yields offered by these investment-grade tech bonds are proving appealing to a broader investor base looking for solid returns.
Investment banks are also adapting to this trend. Goldman Sachs Group Inc. and JPMorgan Chase & Co. have launched new products designed to help investors manage their exposure to tech industry debt. For instance, Goldman Sachs introduced a tool that allows investors to trade a basket of bonds from 18 equal-weighted US high-yield issuers, facilitating quicker adjustments to their portfolios amidst the anticipated large future bond sales for AI investments.
