AI: like a debt machine

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Good morning. Yesterday, we pointed out the run of poor US economic data of late and wondered if and when markets would sit up and take notice. One interesting offshoot to this is, as Barclays noted, that global yields have kept on pushing higher even despite the dark clouds gathering over the US economy. This is genuinely quite weird, and inflation expectations do not completely fill the gap. Possible explanations, wrote Anshul Pradhan at the bank, include the supermassive US federal budget deficit ($2tn-ish this fiscal year?), the rise of price-sensitive investors (who demand proper compensation at auctions) and the new kid on the block catching the eye of duration hunters: the hyperscalers. Much more on all that below. Are hyperscaler bonds the new Treasuries? We’re interested in your thoughts as usual: [email protected].

The Big Tech revolution in credit markets, cont.

Look, I’ll say from the start that I’m not saying this is necessarily good or bad, as such. Just that a really important part of the financial system is getting a complete do-over, mid-flight, and probably not enough people are thinking about what it all means.

That part of the financial system is the corporate bond market, and the revolution is at the hands of the Big Tech behemoths that are tapping into it on an absolutely mind-bending scale.

I’ve written about this before here and here. But the gist is that the hyperscalers have cut their reliance purely on free cash flow to pay for all their AI widgets and have instead turned to the debt markets.

The numbers are just bonkers. Goldman Sachs said in a note earlier this month that US dollar investment-grade issuance had already exceeded $1.5tn so far this year, which put 2026 on track to beat the previous record-breaking blowout from the pandemic era. The bank had previously pencilled in a total of $2.1tn for the whole of this year but now it thinks that may be looking too cautious. The average deal size is $1.7bn, the biggest in the post-crisis era. This includes at least 20 deals at $10bn or more at announcement — a size it describes as “jumbo”. (I’m old enough to remember when “jumbo” transactions were $1bn or more, so thank you Goldman for making me feel ancient.) In the whole of 2025, there were just 12 deals on this scale and from 2022 to 2024, there were 15 in total.

Normally, monster deals are often linked to M&A transactions. Here, not so much. Two-thirds of the value of them in this year and last come from the tech sector.

If charts are more your thing, here’s one from Lotfi Karoui at Pimco:

The green bit for euro issuance is obviously much smaller, but for the much smaller overall euro market, some of these transactions are also vast. (The same goes for the transactions in Swiss francs, Canadian dollars and others.)

So, you get the idea. But this is all bending the credit markets in some very weird directions. One of them is tenors. The average weighted tenor in US IG is 10.7 years, Goldman says. In the issues from big tech companies, however, a fifth comes with an average tenor of more than 14 years and among the big-five hyperscalers, it’s more still, at 16.5.

This all means that credit investors have to totally rethink their sectoral concentration if they want to avoid the fate of stock indices that often look and smell like active tech funds. And if they do want to buy all this lovely tech issuance, they have a duration hedging problem that was not there before, and/or a neat alternative to long-dated Treasuries, for example.

As Karoui at Pimco suggests, this is just one of the weird technical factors that are pushing the market around. “Consider bonds issued by Amazon and Alphabet (Google’s parent company) in both the euro and dollar market,” he said.

In theory, the underlying company fundamentals that drive credit spreads should be largely identical regardless of currency. However, a gap in spread performance has started to emerge.This performance differential is difficult to attribute solely to firm-related risks. Instead, it points to indications of demand fatigue in the dollar IG market on a relative basis vs. its euro IG peer.

In theory, the underlying company fundamentals that drive credit spreads should be largely identical regardless of currency. However, a gap in spread performance has started to emerge.

This performance differential is difficult to attribute solely to firm-related risks. Instead, it points to indications of demand fatigue in the dollar IG market on a relative basis vs. its euro IG peer.

(Our highlight.)

Again, that point in chart form here:

(If the colours are a little unclear on your screen, USD is the one that ends at the top.)

Another wrinkle here is in index construction. In the US market, the preponderance of massive issues from just a handful of hyperscalers leaves the whole index very sensitive to just a couple of names, rather like the stock market.

One thing that could relieve the pressure a bit, if that was deemed to be a useful thing to do, is leaning more on private markets, although the long-term implications of that are tough to call. Torsten Sløk at Apollo reckons we have a market capacity problem here in public debt markets and therefore:

We expect more than $1tn of financing could migrate toward private placements, infrastructure debt, asset-backed facilities, equipment financings and project-level structures — often with collateral, contractual support and structural protections that are unavailable in unsecured public bonds.

We expect more than $1tn of financing could migrate toward private placements, infrastructure debt, asset-backed facilities, equipment financings and project-level structures — often with collateral, contractual support and structural protections that are unavailable in unsecured public bonds.

(More on his thinking here.)

How will we end up looking back on this period? As a long-awaited scaling up of a dusty market, of indices, of hedging practices? Or as a regrettable crowding out in debt markets by Big Tech? Perhaps all of that at the same time. In any case, this market is transforming before our eyes.

One good read

Strains in private credit

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