AI buildout giving tech investors new reasons to watch bond market

Artificial intelligence gives tech investors an entirely new reason to pay attention to the Federal Reserve.

For years, megacap tech companies with large balance sheets have managed to shrug off rising rates that further burden their smaller, less profitable counterparts.

But companies that were once cash cows are burning through reserves and leveraging debt on ambitious data center builds. This leaves the group much more exposed to borrowing costs.

“Tech investors are not used to looking at rates,” Peter Boockvar, chief investment officer of One Point BFG Wealth Partners, said in an interview. “Tech investors suddenly need to listen to what Kevin Warsh has to say and start paying attention to what the inflation statistics are and how the U.S. Treasury market is reacting to that.”

Warsh held his first news conference as Fed chairman on Wednesday. The central bank’s indication of the possibility of an interest rate increase in 2026 led to sales in stocks and an increase in interest rates. The 10-year yield is trading around 4.45%.

Higher rates have always had a big impact on small tech companies, as investors value them based on future profits. When yields rise and the “risk-free interest rate” rises, investors discount future cash flows, reducing their present value.

The impact of rising rates is now moving upward. That’s because the technology’s hyperscalers are engaged in a high-speed race to build AI infrastructure. Amazon, Alphabet, Microsoft And Meta A total of $750 billion is expected to be distributed this year; This is an increase of more than 80% from 2025.

Much of this expansion is financed by debt, and if rates rise, that debt becomes even more difficult to sell. Nvidia, SeerAmazon, Alphabet and Meta are each heading into the debt market worth tens of billions of dollars.

OpenAI CFO Sarah Friar noted that one of the motivations for going public was the ability to tap into debt markets. Reuters on Thursday, citing two sources familiar with the matter, bankers SpaceXThe bond, which was traded on Nasdaq last week, is preparing to meet with investors on a bond offering of at least $20 billion.

“It’s underappreciated,” said Jeff Kilburg, CEO of KKM Financial, adding that there is an “insatiable demand” for AI-related financing. “Tech leadership is embracing debt. This is a perfect recipe for AI people who feel comfortable with what they want to borrow and spend.”

Tech giants need money, as some have exhausted their cash reserves built up over years. Goldman Sachs He recently noted that capex as a percentage of cash flow is at the highest level since the dot-com era. The firm also expects capex to be close to $920 billion this year and says analyst forecasts have been “overly conservative” over the past three years.