Investment-Grade Bonds, Junk-Bond Yields: Warning Signs in AI Debt Boom

[Financial News] As investment in artificial intelligence data centers requires astronomical sums, U.S. companies are issuing investment-grade bonds while also turning to junk-bond investors. More and more companies with top-tier credit ratings are paying yields typically associated with junk bonds, adding to their borrowing costs as AI investment expands.
According to local media on the 23rd, local time, QTS Realty Trust issued $3.9 billion in investment-grade bonds last week to finance a data center project linked to Microsoft. The bonds carried a yield of 7.2%, higher than that of some mid-tier junk bonds.
Last month, BlackRock also issued investment-grade bonds to fund a Texas data center project, and the yield reached 7.5%. It was reported that both bond offerings were sold not only to traditional investment-grade investors, but also to high-yield investors seeking stronger returns.
In other words, the credit ratings are solid, but the market is demanding risk compensation closer to that of junk bonds. Analysts say this reflects concerns that AI data centers require massive upfront capital and may take a long time to generate returns.
Borrowing needs for AI investment are also rising rapidly. Companies have already borrowed more than $410 billion this year to fund AI projects, including data centers.
Stephen Schweitzer, a manager at Advent Capital Management, said, "High-yield investors are becoming tourists in the bond market for top-tier tech companies." He added, "If companies with strong balance sheets offer yields at the BB rating level, it is hard to pass them up."
Big Tech's financing methods are also changing. Technology companies that generate huge amounts of cash have traditionally invested mainly through internal cash flow and equity. But as AI data center construction costs surge, they are increasingly relying on debt financing, including bond issuance.
Even in the secondary market, investment-grade bonds issued by Oracle and SpaceX are already trading at junk-bond-like yields. That suggests they may have to offer higher interest rates if they return to the bond market.
The problem is that far more money will be needed going forward. Vanguard Group estimated that capital expenditures by the five hyperscalers will reach $800 billion this year. It projected that annual spending will exceed $1 trillion from 2027 through 2030, with a significant portion expected to be financed through debt.
Rising borrowing costs are likely to put pressure first on companies with weaker financial resources. Morgan Stanley said, "Big Tech can absorb AI investments that take years to generate profits, but companies with less financial flexibility may struggle to withstand higher interest rates, which could dampen bond issuance itself."

[email protected] Kim Kyung-min Reporter