A rapid surge in borrowing by the world’s largest technology companies — driven primarily by the capital-hungry expansion of artificial-intelligence data-centre infrastructure — is reshaping the investment-grade (IG) bond market and unsettling investors who had, until recently, viewed top-rated corporate debt as the safest corner of global credit. The scale of this AI-financed borrowing binge has accelerated far beyond expectations, forcing lenders to reassess pricing risk, rethink exposure to high-quality bonds and brace for a potential repricing cycle that could reverberate across corporate funding markets.

Investment-grade credit has long been the ballast of institutional portfolios, prized for its stability and historically low default risk. But the current wave of issuance — dominated by technology giants raising unprecedented sums to finance semiconductor capacity, hyperscale cloud infrastructure and next-generation AI clusters — is stretching that equilibrium. With more than $75 billion in new IG debt from AI-focused firms issued within a matter of weeks, investors are confronting the possibility that the sector’s debt-financed expansion may be outpacing its near-term earnings capacity.

Simultaneously, delayed U.S. economic data releases and rising stress in private-credit markets have contributed to a feedback loop of uncertainty, prompting some of the world’s largest asset managers to unwind positions, reduce risk or actively bet against IG corporate bonds. The new environment marks a departure from the last decade’s low-volatility regime, and investors are now weighing whether IG debt — despite its high credit quality — is mispricing the rising macro and sector-specific risks.

Why the AI borrowing cycle is raising alarm across credit markets

The AI investment boom is reshaping corporate behaviour at an unprecedented speed. Major technology firms are racing to secure chips, expand data-centre footprints and lock in supply chains to sustain AI-model training and deployment. This has required capital scale rarely seen outside of large-scale industrial revolutions. But unlike earlier tech cycles, this one is landing in a high-rate environment, where the cost of borrowing is materially higher and investor tolerance for leveraged expansion is lower.

The concern for bondholders is twofold. First, the borrowing wave is arriving at a moment when credit spreads remain near historic lows, giving investors little compensation for incremental risk. In the U.S., spreads for top-rated companies sit close to levels last seen in the late 1990s, meaning that IG borrowers are locking in exceptionally cheap financing — but investors are doing so without a safety cushion should macroeconomic conditions deteriorate.

Second, the speed and concentration of issuance are testing market absorptive capacity. A handful of the world’s largest technology firms now represent a disproportionate share of new IG supply. That concentration not only raises sector-specific exposure risks but also magnifies systemic sensitivity: if AI-infrastructure earnings fall short or if capital-expenditure cycles slow, the downgrade or repricing risk moves sharply higher. For some investors, this is reminiscent of early-cycle credit bubbles, where capital is abundant early on, only to fade when macro headwinds intensify.

These dynamics help explain why spreads on credit-default swaps for major technology companies have risen sharply in recent weeks, even as headline indices suggest calm. Beneath that surface, risk hedging is accelerating, and portfolio managers are increasingly treating parts of the investment-grade tech complex as vulnerable to downward repricing.

Feedback loops emerge between private credit stress and corporate funding

The credit market is also being shaken by turbulence in private-credit funds. A leading alternative-asset vehicle recently restricted withdrawals, sparking anxiety across the $3 trillion private-credit industry. This development has immediate implications for corporate bond markets. Private-credit funds often operate as shadow competitors to public-markets lenders; when they raise borrowing costs or reduce lending capacity, the resulting pressure flows into public-market spreads.

This is where the AI borrowing wave creates a compounding effect. As major tech borrowers absorb large amounts of public-market liquidity at favourable rates, private lenders face a mismatch: they must either raise yields to maintain competitiveness or risk losing deal flow. Either scenario pushes borrowing costs higher for the broader corporate universe.

Market strategists warn that if cash continues to exit private-credit funds, the impact on corporate funding costs could be swift and significant. New issuance would need to be priced at higher coupons to attract buyers; companies would face rising refinancing burdens; and the cumulative pressure could weaken balance sheets across multiple sectors. This chain reaction is precisely the type of systemic stress investors are now watching for — the “next shoe to drop,” as one portfolio manager described it.

Investor behaviour is shifting as valuations look increasingly stretched

The most significant development is how institutional investors are reacting. Several of the world’s largest asset managers have begun cutting exposure to IG credit, citing valuations that no longer reflect underlying economic and sector-specific risks. Some have closed positions entirely, shifting capital into cash, Treasuries or selective high-yield opportunities that offer better risk-adjusted returns.

A growing minority are taking more aggressive positions: shorting IG indices, hedging spreads or rotating into defensive strategies that benefit from spread widening. Their reasoning rests on several arguments:

• IG spreads have little room to tighten further and ample room to widen.
• The economic outlook remains uncertain, with delayed or volatile U.S. data adding ambiguity.
• AI-related borrowing looks early-cycle and may continue to surge.
• Private-credit stress could spill into public markets.
• The cumulative supply from top-rated borrowers could overwhelm demand if risk appetite weakens.

This investor shift has occurred despite the fact that IG credit has held up better than equities, commodities and crypto during recent market volatility. But in the eyes of portfolio managers, stability itself can mask fragility — and the current pricing environment appears too optimistic relative to rising structural risks.

Structural consequences for corporate earnings and market stability

If credit markets begin demanding higher compensation for risk, the ripple effects will be wide. For corporates, especially those relying heavily on capital markets to finance AI-related expansion, higher borrowing costs translate directly into weaker earnings and reduced investment capacity. For sectors dependent on cheap funding — such as technology, telecommunications and healthcare — this repricing cycle could compress margins more quickly than expected.

Beyond earnings, market dynamics could shift. Higher spreads reduce equity valuations for debt-intensive companies, weaken buyback capacity and narrow the window for opportunistic acquisitions. A credit-led tightening cycle also tends to amplify equity-market volatility, creating a feedback loop between asset classes. This dynamic has already surfaced in rising CDS spreads, falling global stock indices and increased demand for hedging instruments.

For the broader market, the emerging pattern suggests that the AI infrastructure boom, while transformative, is not without systemic consequences. Capital inflows into the sector have been so substantial that they are now reshaping credit-market pricing, altering investor behaviour and raising the prospect of a multi-year adjustment phase.

(Adapted from Forbes.com)

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