Unlike equities, credit markets face a growing risk from the AI boom. As companies increasingly use debt instead of cash to finance AI and data center expansion, the rising supply of corporate bonds could pressure credit spreads to widen, even in a strong economy, echoing dynamics from the late 1990s tech bubble.
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Massive AI and cloud infrastructure spending by tech giants is flooding the market with new debt. For the first time since the 2008 crisis, this oversupply, not macroeconomic fears, is becoming a primary driver of market volatility and repricing risk for existing corporate bonds.
A surge in corporate spending on AI, capex, and M&A can boost stock prices. However, this same activity often requires issuing large amounts of new debt, increasing supply and causing credit spreads to widen, leading to underperformance versus equities.
Unlike prior tech revolutions funded mainly by equity, the AI infrastructure build-out is increasingly reliant on debt. This blurs the line between speculative growth capital (equity) and financing for predictable cash flows (debt), magnifying potential losses and increasing systemic failure risk if the AI boom falters.
Morgan Stanley predicts the AI investment cycle, plus M&A and capex, will drive a 60% surge in U.S. investment-grade bond issuance in 2026. This massive supply increase is expected to push U.S. credit spreads wider, even if the underlying economy remains healthy and demand is strong.
Tech giants are issuing massive amounts of highly-rated debt at a discount to fund AI expansion. This makes existing, lower-rated corporate bonds from other sectors look less attractive by comparison, forcing a repricing of risk and higher borrowing costs across the credit spectrum.
The enormous capital needed for AI data centers is forcing a shift in tech financing. The appearance of credit default swaps on Oracle debt signals the re-emergence of large-scale debt and leverage, a departure from the equity and free-cash-flow models that have characterized the industry for two decades.
Tech giants are no longer funding AI capital expenditures solely with their massive free cash flow. They are increasingly turning to debt issuance, which fundamentally alters their risk profile. This introduces default risk and requires a repricing of their credit spreads and equity valuations.
An anticipated $3 trillion in AI-related spending requires significant debt financing, creating a $1.5 trillion gap. This is expected to cause a 60% increase in net investment-grade bond issuance, creating a supply-side headwind that makes the asset class less attractive despite sound fundamentals.
Barclays forecasts a 40% jump in net investment-grade debt supply in 2026, driven by tech sector CapEx and renewed M&A activity. This massive influx of new bonds will test market demand and could lead to wider credit spreads, even if economic fundamentals remain stable.
Massive, strategically crucial AI capital expenditures by the world's wealthiest companies could create a new risk. These firms may be less sensitive to borrowing costs, potentially issuing debt even into a weakening market, which could drive credit spreads wider for all issuers.