AI Frenzy Fuels Record Debt Surge: Investors Demand Sky-High Rates Amid Bubble Fears
By Perplexity News Staff | December 26, 2025
As artificial intelligence companies race to fund massive expansions, debt investors are slamming the brakes with unprecedented interest rates and heightened skepticism, raising specters of a dot-com style bubble.
Record-Breaking Borrowing in 2025
Hyperscalers like Amazon, Alphabet, Meta, Microsoft, and Oracle have issued roughly $121 billion in new debt this year to power AI-driven data center buildouts, with over $90 billion raised in the last three months alone[1]. This borrowing spree, fueled by surging capital expenditure needs outpacing operating cash flows, has flooded bond markets and intensified credit risks.
Smaller AI players are facing even steeper hurdles. Applied Digital, a data center builder, sold $2.35 billion in debt in November at a whopping 9.25% coupon rate—3.75 percentage points above similarly rated peers, translating to about 70% more in interest costs[2][3]. Such “lofty” rates signal deep investor wariness toward unproven AI ventures piling on massive debts[2].
Debt Markets Signal Caution
Unlike the buoyant stock market, where AI optimism has driven shares to new highs, bond investors are telling a starkly different story. Credit spreads have widened notably for Oracle and Meta, with Amazon, Alphabet, and Microsoft seeing lesser but still significant increases[1]. Post-issuance, some AI-related bonds have tumbled in price, underscoring growing caution[2].
The cost of credit default swaps (CDS)—insurance against bond defaults—has surged since June, particularly for hyperscalers, as investors hedge against execution risks in these colossal CapEx plans[1]. For niche AI firms, CDS costs on their debt have spiked even more dramatically in recent months[2].
Bubble Warnings Echo Dot-Com Era
Analysts draw eerie parallels to the year 2000 dot-com boom, when hype outpaced fundamentals, leading to a spectacular crash. Today’s AI debt explosion evokes similar concerns: Construction delays at sprawling data centers could delay revenue from leases to AI tenants, while an potential oversupply of computing power risks a glut of underutilized facilities and debt defaults[2].
“Investors in the A.I.-fueled stock market have largely shrugged off warnings about a tech bubble,” notes New York Times reporter Joe Rennison, but debt markets reveal the underlying skepticism[2].
Future Debt Tsunami Looms
Wall Street forecasts paint a picture of escalating financing needs. UBS predicts up to $900 billion in new global corporate debt in 2026, while Morgan Stanley and JP Morgan eye as much as $1.5 trillion from the tech sector over the next few years to sustain AI infrastructure[1].
This projected deluge could further strain credit markets, pushing spreads wider and CDS demand higher as hedging becomes imperative for exposure to AI’s long-term bets[1].
Investor Strategies Shift
In response, savvy investors are pivoting toward CDS and other derivatives to mitigate downside risks tied to AI’s capital-intensive trajectory. The sector’s sensitivity to execution—delivering data centers on time, securing GPU supplies, and monetizing AI demand—has never been higher[1].
“These Capital Expenditure (CapEx) needs increasingly exceed expected operating cash flows, pushing firms to tap bond markets to fund growth at unprecedented speed and scale.” — Mellon Insights[1]
Broader Implications for Tech and Economy
The AI debt surge underscores a high-stakes gamble: Will explosive demand for generative AI and machine learning justify the trillions in infrastructure spend? Or will reality mirror the dot-com bust, leaving a trail of overleveraged companies?
For now, debt markets are voting with their wallets, demanding premiums that could slow the AI arms race. As hyperscalers and startups alike push boundaries, the bond market’s wariness serves as a sobering counterweight to equity euphoria.
Economists and strategists urge vigilance. With global tech debt potentially ballooning to $1.5 trillion, any stumble in AI adoption—be it regulatory hurdles, energy constraints, or waning hype—could ripple through financial systems worldwide[1][2].
What’s Next for AI Financing?
Looking ahead, expect intensified scrutiny on AI firms’ cash burn rates, revenue ramps from data centers, and ROI on GPU-heavy investments. Investors may favor established hyperscalers over speculative newcomers, further widening the chasm in borrowing costs.
Meanwhile, alternative funding avenues like private equity or government subsidies could emerge, though bond markets remain the lifeblood for rapid scaling. As 2025 closes with records shattered, 2026 promises to test whether AI’s promise outweighs its perilous debt load.