Silicon Valley goes on a borrowing binge as the market aggressively dumps assets

The AI fundraising frenzy by tech giants is facing a cold shoulder from the bond market.

According to MarketAxess data, this period saw AI-related bonds with maturities of 10 years and above continue to fall in price, becoming one of the worst-performing issues in the investment-grade bond market.

A case that best reflects market sentiment comes from Amazon. On Tuesday this week, the company issued $25 billion in bonds, but demand for long-dated bonds remained weak. The Financial Times, citing sources including bankers and investors, said its five-year bond subscription orders were about 20% higher than those for its 30-year bonds.

In addition, the yield on a single 30-year SpaceX bond rose from the issuance price of 6.7% from less than two weeks ago to 7.3%.

According to Bank of America Global Research, the five mega-cap cloud service providers—Amazon, Google, Meta, Microsoft, and Oracle—have issued bonds whose yields are currently about 0.6 percentage points higher than those of blue-chip bonds with the same rating and maturity. This risk premium is the highest across all industries in the investment-grade market.

Supply glut drags down demand

The immediate trigger for this round of selloff is an unprecedented wave of bond issuance by tech companies as they gear up for an AI arms race.

According to Bank of America Global Research statistics, so far this year, cross-currency issuance of high-rated AI-related bonds has reached $270 billion, nearly double the total for all of last year.

The continuous influx of new debt supply has sharply increased pressure on investors’ holdings.

John Lloyd, Global Multi-Asset Credit Director at Janus Henderson, said that because many portfolios already hold a large amount of AI-related debt, investors have to sell the mega-cap cloud service provider bonds they already own in order to make room for Amazon’s new issuance. He said:

You have to offer enough concessions to get us to participate in the new issuance.

The recent sharp volatility in tech stocks has also weighed on market sentiment.

Lloyd added that some investors already have substantial exposure to the technology sector within their stock portfolios, which may further reduce their willingness to add related risk exposure in the bond market. Amanda Lynam, Chief Credit Strategy Analyst at Goldman Sachs Research, shares the same view.

Long-term returns in doubt, investors shift to the short end

The selling pressure is concentrated in the long end, with the deep logic rooted in investors’ fundamental doubts about the long-term return on AI capital expenditures.

Mariya Entina, portfolio manager at the DoubleLine fund, said:

Buying 30-year bonds typically requires companies to have a very stable outlook and clear investment returns, but there is still uncertainty about the long-term profitability of AI capital spending.

She said the firm is more inclined to take more near-term risk.

Pramod Atluri, portfolio manager at Capital Group, similarly favors short-dated bonds from mega-cap cloud service providers. Atluri said:

Technology iteration is so fast that long-term borrowing becomes a higher-risk proposition. What the industry will look like ten years from now is something we simply can’t predict.

Entina also pointed out that the main buyers of long-dated bonds are usually insurance companies and pension funds. Such institutions need to match long-term liabilities, and their investment style tends to be relatively conservative, meaning they have a lower tolerance for the above uncertainties.

Higher-rate environment adds insult to injury

The appeal of long-dated bonds from mega-cap cloud service providers has also been further damaged by elevated short-term yields on U.S. Treasury bills.

With inflation still running above target and market expectations that the Federal Reserve policy rate will stay “higher for longer”—especially after the new Fed chair, Waller, released hawkish signals at his first meeting last month—short-dated U.S. Treasuries have been offering quite attractive yields.

One analyst focused on high-grade credit said:

If you can lock in an attractive yield without going too far out along the yield curve, why take on more risk?

At present, the short-term borrowing costs for mega-cap cloud service providers remain stable, indicating that the market is not worried about these companies’ near-term ability to repay. But investors are making clear through action that the bond market is far more cautious than the stock market about whether this AI buildout wave can deliver its long-term promises.