The market for highly-rated corporate bonds has bifurcated, with AI-related firms encountering caution from investors while traditional issuers, like financial and industrial companies, are experiencing robust demand. Portfolio managers are not concerned about the default risk of AI-linked companies but rather the substantial and unpredictable borrowing required to fund data centers, chips, and other AI infrastructure. This has led bond buyers to demand more generous concessions and re-evaluate portfolio concentration limits for AI-related debt.
Gross debt issuance from hyperscalers is projected to reach a record $420 billion next year, a 60% increase from 2026 estimates, according to Goldman Sachs data. In contrast, overall U.S. corporate issuance through August rose 30% year-over-year to $1.9 trillion. This divergence was evident in recent bond sales; Google's parent company, Alphabet, had to offer significant concessions for its August debt sale, while insurance broker Aon's $13.5 billion acquisition financing attracted $65 billion in orders, causing pricing on its 30-year tranche to tighten by 35 basis points due to high demand for scarcer bonds.
Meanwhile, despite a significant rise in real yields, stocks have shown unusual resilience, supported by strong corporate earnings, economic growth, and AI-related investment. J.P. Morgan Private Bank notes that the S&P 500 has historically fallen 4% in the six weeks following the first interest rate hike, but this time, after a 25 basis point hike by the Federal Reserve, the stock market has remained relatively stable. This is attributed to the fact that current rate increases are not solely driven by inflation or labor market concerns, but also by factors like an estimated $315 billion in hyperscaler bond market issuance in 2027 and accelerating AI investment, which are proving to be an offset to higher borrowing costs.
Morgan Stanley strategists, however, envision a scenario where the S&P 500 could drop to 7,100 if higher energy prices and tighter financial conditions further pressure valuations. The 10-year Treasury yield recently approached 5%, its highest level since 2007. While the Dow has fallen, the Nasdaq 100 has seen a slight increase, largely after the Federal Reserve's September 16th meeting. This divergence is seen more as a rotation as investors adjust holdings in response to the Fed's hawkish policy, with technology stocks rallying partly because AI infrastructure commitments are long-term and less sensitive to small rate movements.
