AI boom highlights a flawed bond market

The surge in AI-related borrowing is making passive bond indices more concentrated and less effective at pricing risk.

• The five major hyperscalers—Alphabet, Amazon, Meta, Microsoft and Oracle—plan around $800 billion of capital expenditure in 2026, more than five times the level of three years earlier.
• Analysts expect their combined capital expenditure to reach roughly $4.0 trillion over the following four years, while rising semiconductor, component and data-centre costs could make that investment even more expensive.
• JP Morgan estimates that the five companies will need to issue an additional $1.5 trillion of bonds over the next five years; technology already represents just over $1.0 trillion, or 14 per cent, of the US investment-grade bond market, up from 7 per cent a decade ago.
• The shale boom offers a warning: passive funds absorbed rising issuance as energy companies grew in the index, keeping spreads artificially tight before the cycle turned and losses became severe and concentrated.
• Big Tech differs from the shale companies because much of the investment is funded from cash flow and the established firms are likely to survive even if returns disappoint, although SpaceX's troubled inaugural bond issue highlights the risks of weaker issuers.

Takeaway: Investors should question the unchecked issuer weights of traditional bond indices and consider capped or actively managed exposures, while recognising that the strongest technology companies may still represent relatively good credit risks.