The AI boom comes to bond markets

Key takeaways

• AI investment is driving a surge in bond issuance, as technology companies borrow to fund major infrastructure and data centre spending.
• Big tech firms are raising more debt than in previous years, with capital expenditure now exceeding free cash flow for many hyperscalers.
• Demand remains strong despite increased supply, helping keep credit spreads near historic lows while bond yields stay attractive.
• Credit quality matters more than ever, with investors becoming increasingly selective as borrowing expands beyond the largest technology firms.

In June, SpaceX raised $25bn of debt across five mammoth tranches, with investors willing to lock up their cash for as long as 30 years, all for a first-time issuer with a large negative sign against its net income. The deal is emblematic of a changing credit market. As technology companies race to fund unprecedented capital expenditure programmes, they are turning increasingly to bond markets for financing. For much of the past decade, however, the US investment grade market was characterised by scarcity. Coupons and maturing bonds returned cash to investors nearly as fast as companies issued new debt, leaving little net new paper to absorb. That imbalance helped keep credit spreads, the extra yield earned for lending to companies rather than governments, persistently tight.

The supply story is now reversing. Net investment grade issuance in North America (new bonds, minus the ones maturing and coupons paid) has surged from around $285bn in 2019 to $413bn in 2025, with an estimated $1.0tn in 2026.

So what's driving it?

Mostly, the cost of building AI. For much of the last decade the biggest tech firms were a cause of scarcity: cash-rich, buying back shares, issuing little. Between 2020 and 2024, Microsoft, Alphabet, Amazon, Meta and Oracle issued an average of roughly $47bn of US bonds a year between them. In 2025, that number was around $113bn.

The reason is capital expenditure running above $600bn[1] in 2026, more than these firms generate in cash. The shortfall has to be funded externally, so some of the most cash-generative companies in history are now borrowing to keep up with their own ambitions. That said, the funding gap is not being financed exclusively through debt. Companies such as Alphabet and Oracle have also been issuing equity-linked compensation and share capital, helping absorb part of the cash flow-capex deficit. This mixed funding approach is one reason why credit spreads have remained relatively well behaved despite the sharp increase in borrowing needs.

Capex now exceeds free cash flow (FCF) for a majority of key hyperscalers

Source: W1M, Bloomberg. Data as at 30 June 2026

Note: Oracle free cash flow was negative in 2025, while Amazon free cash flow was negative in 2021 and 2022

Outside of tech, the unglamorous backbone of the investment grade fixed income market—industrials, utilities and communications—is issuing too, much of it to provide the very power and infrastructure the AI buildout demands. The rise is broad-based, even if its marginal driver is singular. The market has moved from supply-constrained to supply-heavy.

The SpaceX deal provides a useful illustration. The company initially sought to raise $20bn but ultimately increased the transaction to $25bn after attracting almost $90bn of investor demand. At first glance, those figures suggest a market still short of bonds. Yet despite the enthusiasm, SpaceX still had to offer investors an attractive entry point to complete the deal, and the bonds subsequently traded below their issue price. The message is not that demand has disappeared. Rather, investors are becoming more selective as the supply of new bonds grows. That marks a subtle but important change for a market that has spent much of the past decade supported by a shortage of paper.

Net issuance is expected to be near record-highs in 2026

Source: W1M, Bloomberg. Data as at 30 June 2026

Note: Net investment grade issuance in North America

The textbook says spreads should be wider. They aren't.

Rising bond issuance would normally be expected to push spreads wider. So far, that has not happened. Investment grade spreads remain close to multi-decade lows and new deals continue to be heavily subscribed.

One reason is that overall yields remain attractive. Even with tight spreads, many investment grade bonds still offer yields above 5%, drawing demand from pension funds, insurers and other long-term investors.

The composition of supply also helps. Much of the recent issuance has come from large, financially robust companies funding ambitious investment plans rather than weaker borrowers looking to shore up balance sheets. As a result, the market has absorbed a significant increase in supply without a meaningful repricing of risk.

For now, demand continues to keep pace with issuance.

Spreads have tightened, while yields have increased

Source: ICE BofA US Corporate Index, W1M, Bloomberg. Data as at 30 June 2026

The rise in issuance is also changing the composition of the market. The weight of the largest hyperscalers[2] in the US corporate bond index has increased by 42% since the end of 2024 (from 2.9% to 4.2% of the index), meaning passive investors now have materially more exposure to these companies than they did only a few years ago.

However, the story extends beyond the hyperscalers themselves. The AI buildout is supporting borrowing across a much broader range of issuers, from data centre operators and cloud infrastructure providers to the utilities needed to power them. While some have strong balance sheets and resilient cash flows, others are taking on significant debt in anticipation of future growth. As a result, differences in credit quality are becoming increasingly important beneath what still appears to be a relatively calm market at the index level.

What happens next?

Issuance is unlikely to fall away quickly. Capex plans remain elevated, and the funding gap across parts of the corporate sector suggests continued reliance on debt markets. Spreads, however, look more finely balanced. With valuations already tight, there is limited room for further compression, while the risks to widening are more obvious should growth stall or demand soften.

Our approach

For us, this is not an argument against credit. Yields remain attractive and provide a strong income cushion, and spreads can remain tight for extended periods. But, as the market evolves, outcomes will increasingly be driven by issuer selection rather than broad market direction. We focus on identifying resilient businesses with strong balance sheets, while being highly selective in areas where leverage and expectations are rising. Our Waverton Global Credit Opportunities fund, which invests flexibly across the cycle, is designed with exactly this environment in mind: capturing income while navigating the risks of a more complex, supply-driven market.

Glossary

Capital Expenditure (Capex) - Money spent by a company on long-term investments such as data centres, infrastructure and technology.

Credit Spread - The extra yield investors receive for lending to companies rather than governments.

Free Cash Flow (FCF) - The cash a company generates after covering its operating costs and investment spending.

Yield - The return an investor earns from holding a bond, expressed as a percentage.