Bond market anxiety is growing over AI capex budgets
Investors are increasingly frustrated with the amount of capital needed to make AI development a reality.
This is playing out in real time in the bond market, where the biggest names joining the blitz — Google, Amazon And Meta — We are seeing credit spreads widening as fixed income investors demand greater rewards for lending to companies.
Yields rose further this week after Alphabet removed its capital spending forecast, raising concerns that other hyperscalers could follow suit.
One of the reasons for the increase in capital expenditure budgets is the increasing cost of energy. Energy is quickly becoming a major expense for all the hyperscalers building large data centers across the US.
GE Vernova CEO Scott Strazik told CNBC that he expects the current inflation environment to continue, driven in part by the increasing geopolitical environment. Just this week, oil rose above $100 per barrel.
The movement in Treasury yields is also causing concern among fixed income investors. Mizuho wrote in a letter to clients Friday morning that capital spending increases are testing investor limits, with companies once viewed as capital bastions now seeing a dramatic increase in AI-related costs.
Analysts added that hyperscalers are now collectively on track to spend more on capex than they generate in free cash flow next year.
“It’s leading to intense discussions among bond and stock investors who have contact with the biggest names in technology,” said a portfolio manager at a credit fund who asked to remain anonymous to discuss sensitive conversations.
As concerns grow SeerThe US 5-year credit default swap, or CDS, is once again trading at its highest level in years.
In a note to clients Wednesday, Barclays credit analyst Andrew Keches wrote that Oracle’s CDS is once again seen as a proxy for AI debt fears.
“ORCL CDS’s recent appeal extends beyond company-specific fundamentals, reflecting its role as a liquid hedge on AI capex, OpenAI implementation, and broader data center spending narratives,” Keches wrote.
As building and leasing data centers remains capital-intensive, Oracle faces questions from investors about how active it plans to be in the debt market in the coming years.
Earlier this month, ratings agency S&P Global downgraded Oracle’s credit rating to BBB-, just one notch above junk status.
But executives at the company are confident in Oracle’s ability to win the AI race. The company has a growing relationship OpenAI and hyperscalers like Meta and NvidiaThey are also working with Oracle on cloud architecture.
Still, the move in tech bond yields could impact the financing of future deals, portfolio managers told CNBC.
Meta is considering financing the $12 billion Texas data center, with pricing expected to be finalized early next week, according to a source familiar with the talks who requested anonymity to discuss the company’s plans.
Finance Times reported that the deal would be priced at a higher borrowing rate than previous projects; This is a sign that investors are not only demanding more, but also questioning the return on investment.
