On Tuesday, credit risk indicators for several major technology companies climbed to all-time highs, according to data. Investors are preparing for a wave of bond issuance following the earnings season and worry that this supply could further pressure an already strained debt market.
Meta Platforms, Inc. (META.US) and SpaceX (SPCX.US) are among the first to report earnings this week, and investors will be watching for updates on both companies' spending plans and AI ambitions. Lotfi Karoui, a multi-asset credit strategist at PIMCO, said tech companies have repeatedly raised their related estimates, and bondholders expect these firms to keep issuing debt to finance AI buildouts. This potential oversupply of issuance is driving up the cost of credit protection on tech bonds.
Data from ICE Data Services shows that credit default swaps (CDS) for Oracle (ORCL.US), widely regarded as a barometer of AI debt risk, briefly rose to a record 343 basis points. Meta's credit risk gauge also hit an all-time high, climbing 6.3 basis points to 114.8 basis points ahead of its Wednesday earnings release. "We have not yet found the right equilibrium for how much debt issuance the market can absorb," Karoui said in an interview on Tuesday. "There is still a wide range of forecasts for how much debt capital this AI buildout will ultimately consume."
Data shows that companies worldwide have borrowed more than $450 billion this year for AI-related research and development. Now, as tech companies report their latest results and the so-called quiet period ends, the market expects them to re-enter the bond market, and with sizable issuance.
Credit Risk in the AI Ecosystem Heats Up
Bondholders have already been trimming some existing exposure to the sector to make room for potential large-scale issuance. Bank of America analysts estimate that on Monday dealers bought about $451 million of hyperscaler bonds, the highest net buying since mid-September. Analysts believe this may be the result of investors selling such bonds due to supply-and-demand concerns. Investors expect Meta to issue bonds in the coming days. If Meta launches an offering, it would break a more than two-month "drought" in dollar-denominated bond issuance by large U.S. tech companies. Meanwhile, SpaceX is in talks with banks and investors to raise $40 billion to purchase chips from NVIDIA (NVDA.US).
When Meta last issued U.S. bonds in April, it told investors it would not re-enter that market until at least the fourth quarter. That statement was intended to support demand for the April issuance, but it also led market participants to believe that Meta would still issue bonds again in the U.S. market this year to support its rising AI investment and spending goals. Since 2022, Meta has typically reported third-quarter results on the last Wednesday of October, but this year it chose October 21, the second-to-last Wednesday of the month. Some investors believe this timing could give Meta more flexibility to issue bonds after earnings and before the November midterm elections. CreditSights analyst Jordan Chalfin wrote in a report last month that he sees a possibility of a large post-earnings bond deal from Meta. Meta's April issuance was a six-part deal totaling $25 billion. Since then, the company has been in talks with European bond investors about a potential offering. Hyperscalers including Meta are tapping different global markets to finance their AI expansion.
Hedging Demand Rises, CDS Trading Volume Hits Record
Aggressive AI spending plans and record borrowing by large tech companies have put the sector under fresh scrutiny as investors increasingly question whether the related investments can generate sufficient returns. This has driven up demand for CDS tied to the tech industry and pushed trading volumes to new highs. Riskier credits in the sector, such as CoreWeave (CRWV.US), have seen particularly severe hits to their stocks and bonds. Analysis by Barclays credit strategist Jigar Patel shows that as of September, CDS trading volume linked to the ten largest hyperscalers and chipmakers surged 691% this year to a record $140 billion, up from about $17.7 billion a year earlier. However, some swap contracts only began trading recently.
T. Rowe Price fixed income portfolio manager Steven Kolenstein said: "As AI-related issuance and financing needs continue to grow, investors are increasingly focused on the correlations between what were previously viewed as distinct credit entities." SpaceX reported earnings after the U.S. market close on Tuesday. The company last raised funds in the high-grade bond market in June, when it issued $25 billion of bonds, its first-ever bond sale. ICE data shows that on Tuesday morning, the five-year CDS on SpaceX debt briefly rose to 242 basis points, a record intraday high; the CDS was around 111 basis points when it began actively trading in June.
Macroeconomic uncertainty, rising global interest rates and concerns that changes in the U.S. political landscape could weaken support for the sector have all weighed on tech bond issuance in recent weeks. The last major U.S. tech bond issuance was by Google parent Alphabet (GOOGL.US, GOOG.US) in August. Many market participants expect large tech bond issuance to pick up after this year's midterm elections, with growth becoming more pronounced in 2027.
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