The AI debt boom: Balancing risk and opportunity

AI-driven debt issuance is ballooning, with major tech firms issuing hundreds of billions. While the investment-grade market has absorbed this supply, spreads on hyperscaler and AI-related bonds have widened. This widening reflects both current and anticipated future issuance, alongside investor concerns about future AI revenues meeting expectations.

We favor AI issuers with diversified business models and fungible infrastructure. Companies that can repurpose assets or pivot to new AI applications offer greater adaptability. We are modestly overweight bonds from select hyperscalers and investment-grade issuers focused on data centers, as well as industrial suppliers providing power and infrastructure.

However, significant uncertainty remains. The AI buildout's revenues still lag investments, and future revenue generation for some companies is uncertain. We remain cautious, balancing concentration risk and expected returns, and are selectively evaluating bespoke debt structures.