The capital expenditure sprint by artificial intelligence hyperscalers is reshaping the corporate bond market, introducing new risks and obligations. Anders Persson, chief investment officer of Global Fixed Income at Nuveen, described current bond market conditions as a "toxic mix" pushing yields higher, leading his firm to adopt a more neutral stance on duration.
Five major technology companies—Alphabet, Amazon, Meta, Microsoft and Oracle—have committed a total of $969 billion to AI infrastructure. More than two-thirds of this, $662 billion, is earmarked for data center-related leases that have not yet commenced, according to a Moody's analysis published last month.
This aggressive buildout, primarily for massive data centers and cloud infrastructure, is expected to incur a total cost in the trillions. While companies largely fund this through operating cash flows, the scale of spending has necessitated bridging the gap between capital expenditure and free cash flow with new debt.
In 2023, these five companies collectively issued approximately $121 billion in new debt via bonds. This marks a significant increase from $40 billion issued in 2020, demonstrating a rapid acceleration in borrowing activity to support AI investments.
Wall Street estimates project the AI-related bond supply could range from $100 billion to $300 billion in the current year. Over the next three to five years, total data center investment could reach between $1.5 trillion and $3 trillion, according to various analyses.
Mohit Mittal, chief investment officer of core strategies at Pimco, which manages about $2.3 trillion in assets, highlighted the historical pattern. "Any kind of large capital expenditure cycle that we have seen over history at some point leads to the risk of overinvestment," Mittal said.
Historically, major capital spending booms have concluded with bankruptcies, consolidations and market adjustments. The late 1990s fiber-optic network buildout saw companies like WorldCom and Global Crossing fail after spending billions on infrastructure.
Similarly, the shale revolution led U.S. oil and gas companies to issue $350 billion in debt for drilling, resulting in hundreds of bankruptcies following oil price declines in 2014 and 2015. The early 1900s adoption of electric power led to roughly half of the 3,000 small utilities disappearing or being sold during a decade of consolidation.
Persson, who served as a tech analyst during the dot-com era, brings the perspective of hindsight to the current situation. Bond investors, unlike equity investors, prioritize fair compensation for risk, including the potential for overinvestment and subsequent supply gluts.
While current spending is substantial, the long-term victors in previous capital cycles inherited strong infrastructure. These entities reaped benefits such as lower-cost bandwidth, reduced consumer prices and consolidated power grids, suggesting potential for future gains despite initial market turbulence.
