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Upcoming stock offerings from SpaceX, Anthropic and OpenAI make tech — and AI in particular — impossible to avoid in US equity markets. But bond traders, too, are increasingly finding themselves bound up with the big plans of Silicon Valley, even in markets far from the main AI action.
Amazon, Meta Platforms, Alphabet and Oracle issued a combined $159bn in bonds this year, according to LSEG data, as they race to build massive AI data centres. About $50bn of that came through so-called “reverse Yankees” — when US companies borrow in foreign currencies.
Since non-dollar markets are much smaller, a few large companies can quickly come to dominate. In the first four months of the year, US groups accounted for more than 20 per cent of investment-grade supply in each of the euro, sterling, Canadian dollar and Swiss franc markets, according to Goldman Sachs. That creates some unusual challenges for portfolio managers.
On an individual basis, the bonds are hardly risky. Take Google parent Alphabet’s recent ¥577bn ($3.6bn) sale of yen-denominated debt. The largest tranche was made up of five-year notes paying a measly 2.4 per cent, reflecting that the company is vanishingly unlikely to go bust. It’s not hard to see why that would be appealing to an investor with a Japan-focused mandate, who can get a 50 basis-point premium to the local benchmark rate with very little risk.
The catch is that global investors can end up with portfolios that are less diversified than they look. And not just because big companies tap multiple markets. Analysts at Barclays point out that tech interlinkages are growing. The $55bn in Meta bonds issued over the past year should be considered alongside the $27bn bond issued by its data-centre joint venture with Blue Owl. Many electricity companies and other suppliers issue debt that indirectly relies on tech giants’ continued growth.
At worst, it’s possible to imagine a “multi-asset” portfolio of global stocks, public fixed-income, private debt and infrastructure assets that turns out to hang on a handful of companies. The trend should increase the value of active management and alternative assets for investors that want genuine diversification, even if it might at times mean getting worse returns than from tracking a benchmark index.
Most Big Tech groups were late to the debt game — Facebook owner Meta had no long-term debt at all until 2022 — which means that for now they are still a relatively small part of global benchmarks. Given the scale of their capital expenditure plans, however, that share is only likely to increase. Meta, Alphabet, Microsoft and Amazon together are expected to spend more than $2tn over the next three years, according to analyst forecasts compiled by Visible Alpha.
Debt is, of course, less risky than equity. So things have to get pretty bad for lenders to lose money; the hyperscalers are a pretty safe bet. Still, unlike equity investors, bondholders don’t get to ride the euphoria to the moon in good times. Fixed-income investors have a reputation for being a bit gloomy compared with their equity counterparts. That tech is everything everywhere gives them an extra reason to grumble.
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