Major AI firms' bond yields surge as massive investments raise risk concerns

Major U.S. artificial intelligence companies, including Google, Amazon, Oracle, Micron, Nvidia, and SpaceX, are experiencing a sharp increase in the credit spread and credit default swap (CDS) rates on their corporate bonds. This trend indicates a market reassessment of the risks associated with these companies' debt, driven by substantial investments in AI infrastructure.

The average spread for bonds issued by ten major AI companies, with credit ratings from AAA to BBB-, reached 94 basis points (bp) as of August 13. This is a significant jump from 59 bp in the same period last year and contrasts with the relatively stable average spread of around 80 bp for all U.S. investment-grade bonds. This widening spread suggests that bond investors are demanding higher yields to compensate for the increased risk.

The rising credit spreads are a direct consequence of AI-related capital expenditures growing faster than the increase in cash flow generation for these tech giants. This has led to a greater reliance on borrowing to fund their operations and expansion. Consequently, investors are factoring in this increased leverage and potential for higher default risk when pricing these bonds.

Furthermore, the cost of insuring against default, measured by CDS premiums, has also surged. For 5-year bonds from these AI firms, CDS rates are significantly higher than the average for general U.S. investment-grade corporate bonds. For instance, Oracle's CDS is at 196 bp, SpaceX's at 157 bp, and Nvidia's at 73 bp. This rise in CDS premiums reflects not only direct borrowing costs but also potential contingent liabilities, such as financial guarantees for AI data centers.

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CDS reflects not only direct borrowing costs but also risks from contingent liabilities such as providing guarantees.