'The money has to come from somewhere,' says Bryce Doty at Sit, of pressure heavy AI-debt supply and the rest of the bond market

AI debt has sold off sharply in July

More cracks have emerged in the facade of the artificial-intelligence spending boom in July, right as more "hyperscalers" are due to report quarterly earnings.

Google parent Alphabet $(GOOGL)$ $(GOOG)$ told the world last week it plans to increase AI spending to between $195 billion and $205 billion for the full year, not dial it back.

Microsoft $(MSFT)$, Meta Platforms (META) and Amazon (AMZN) are on deck to deliver earnings on Wednesday and Thursday. Oracle's $(ORCL)$ results arrived in June and Nvidia's (NVDA) are due in late August. Microsoft declined to comment; the other companies did not immediately respond to requests for comment.

AI-related debt has sold off sharply in recent weeks, causing spreads to gap out, as the below chart from BofA Global shows. This comes as the rest of the high-grade corporate bond market has held up better.

Investors helping fund the hyperscalers hope supply might ease up in the year's second half.

"We believe issuers will become more cautious," said Lukasz Labedzki, an analyst focused on fixed income at the Franklin Templeton Institute, on Monday.

Labedzki pointed to what could be a record year for U.S. investment-grade corporate-bond issuance. More than $1.2 trillion of high-grade supply was issued in the first six months of 2026 - the most since 2021, when the COVID crisis triggered steep rate cuts and a borrowing blitz by major U.S. corporations. Of this year's tally, roughly $200 billion in hyperscaler supply has been added, he said.

"This comes on top of still significant borrowing needs from the U.S. government," Labedzki said. Corporate bonds pay a spread, or premium, above benchmark Treasury rates to help compensate for credit risks.

Investors lately have punished shares of hyperscalers for footing the bill for the AI buildout, while rewarding chip SOX and memory stocks DRAM, as well as other parts of the AI complex that benefit from it. That's driven high volatility under the surface of the major stock indexes.

A similar pattern has been playing out in U.S. corporate bonds. It has pressured spreads on longer hyperscaler bonds that mature in a decade or more the most, as the below BondCliQ chart shows.

Specifically, 10-year AI debt from the group was trading at a spread of about 121 basis points above the Treasury rate, on an issuance-weighted basis. That compares with a high-grade corporate spread of about 80 basis points for the ICE BofA US Corporate Index, up from about 73 basis points in June.

"The money has to come from somewhere," said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors. "If you pull money from other sectors to buy the bonds, or a new issue from the hyperscalers, the result is you are going to see a little spillover."

The concern hasn't only been about the magnitude of hyperscaler spending on AI, but the higher costs of capital to finance it and who might benefit from all that spending.

The AI-debt supply has been pressuring Treasury yields higher too. The benchmark 10-year Treasury yield BX:TMUBMUSD10Y eased back slightly on Monday, but was still near 4.65%. The 30-year Treasury yield BX:TMUBMUSD30Y has been stuck well above 5% for its longest stretch since 2007.

Moody's Ratings said last week it expects AI-related capital expenditures from the hyperscalers to reach $1 trillion next year.

"The supply, structurally, should keep yields elevated," said Joe Boyle, head of asset-class specialists at Hartford Funds.

Yet many AI hyperscalers are "really high-quality companies" with other avenues besides AI that "will make their debt money good," he said.

"We don't know what AI is going to be, at the end of the day," Boyle said, but the opportunity to buy high-quality corporate debt with a bit of extra spreads can crowd out Treasurys, he added.

With the U.S. debt pile now pushing $39.7 trillion, that also "pushes rates structurally higher," Boyle said.

-Joy Wiltermuth

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July 27, 2026 17:35 ET (21:35 GMT)

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