The pace at which tech behemoths are raising capital to fuel their expansion is the most intense since the dot-com era, yet bond investors are not sharing the optimism. This month, the risk premium for high-grade U.S. tech bonds has climbed to 79 basis points, a significant widening from 74 basis points at the end of May.
Since June, Alphabet has completed an $85 billion equity offering, SpaceX has shattered IPO records with a $75 billion valuation, OpenAI is considering going public as early as next year, rival Anthropic has already taken steps in that direction, and Meta is also planning an equity raise.
In theory, equity financing strengthens balance sheets, providing a thicker cushion for creditors. However, many of these companies already boast robust operating cash flows. Their rush to secure massive funding leads many bond investors to believe that AI-related capital expenditures will far exceed previous forecasts—and, correspondingly, so will the debt load.
"This tells us that the scale of their capex is likely to continue increasing," said Tom Murphy, head of investment-grade credit at Columbia Threadneedle.
Market Jitters Surface in Bond Prices
Concerns are already being reflected in market prices.
SpaceX completed a $25 billion bond issuance this week, but traders were caught off guard by the speed of the price decline. By Friday afternoon, the bonds were showing a paper loss of approximately $360 million relative to U.S. Treasuries.
Alphabet's bonds also softened following its equity sale announcement, with some market participants attributing this to investor worries about the AI spending demands facing the parent company of Google.
Wall Street Revises Forecasts Upward
Wall Street banks are revising their AI capital expenditure forecasts upwards.
JPMorgan Chase now projects that total spending related to AI and data centers will reach $5.5 trillion by 2030, an increase of roughly $400 billion from its forecast last November. Consequently, the bank estimates that data centers will need to raise about $2.1 trillion in the investment-grade bond market over the next five years, a 40% increase from its prior forecast of $1.5 trillion.
Taking SpaceX as an example, the company holds $100.8 billion in cash, but S&P Global Ratings estimates it will burn through approximately $113 billion by the end of next year and another $90 billion by 2028, making further debt and equity financing highly likely.
Equity as a Complement, Not a Substitute
"Bondholders tend to cheer equity raises, seeing them as a sign of a decelerating balance sheet deterioration," said Anthony Woodside, head of multisector fixed income at L&G Asset Management America. "But it actually means more debt is coming too—equity isn't replacing debt; it's supplementing it."
Not everyone shares this pessimistic view. Arvind Narayanan, co-head of investment-grade credit at Vanguard, sees tech companies' equity sales as a "very positive signal" for bond investors, suggesting management's confidence in their AI plans is strong enough to justify diluting existing shareholders.
However, buyers are becoming more selective. Asset managers are demanding higher yield compensation for AI-related bonds, prompting some issuers to tap overseas markets to avoid overwhelming U.S. buyers.
"They can flood the market with debt, but the cost is they have to pay wider and wider spreads," said Jeff Schrom, a credit strategist at Robert W. Baird, referring to the hyperscalers.
A Deeper Concern: The Long Duration Risk
A deeper unease lies in the duration of these bonds. SpaceX issued 20- and 30-year bonds, Nvidia issued a $25 billion multi-tranche offering, and Alphabet issued a 100-year sterling bond in February.
Investing in these bonds means taking on the risk of technological obsolescence over decades. The tech industry is littered with examples of seemingly promising ventures that were ultimately left behind by the times.
In the best-case scenario, bondholders rarely capture the spectacular returns that equity investors might. However, in the worst-case scenario, their losses can be just as severe.
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