AI Boom Fuels Record Debt Surge: Investors Demand Higher Rates as Risks Mount
Artificial intelligence companies are borrowing billions to fuel their explosive growth, but debt investors are sounding alarms with steeper interest rates and rising hedges against default, signaling growing wariness over the sustainability of the AI frenzy.
Hyperscalers like Amazon, Alphabet, Meta, Microsoft, and Oracle have issued roughly $121 billion in new debt in 2025 alone to fund massive data center expansions and GPU acquisitions, with over $90 billion raised in the last three months.[1] Globally, tech firms have ramped up bond issuance to a staggering $428.3 billion through early December, nearly doubling previous levels amid the AI spending rush.[2]
Unprecedented Borrowing to Chase AI Dominance
The debt spree is driven by soaring capital expenditure (CapEx) needs that outpace operating cash flows. Cloud giants are racing to build sprawling data centers equipped with cutting-edge servers to meet surging demand for AI training and inference capabilities. “These CapEx needs increasingly exceed expected operating cash flows, pushing firms to tap bond markets to fund growth at unprecedented speed and scale,” according to analysis from BNY Mellon.[1]
U.S. tech companies led the charge, accounting for $341.8 billion of the global total, followed by European firms at $49.1 billion and Asian companies at $33 billion. Even cash-rich giants, traditionally self-funded, are turning to low-cost debt amid strong investor demand—until recently.[2]
Debt Markets Flash Warning Signs
While stock investors have propelled AI-related shares to new highs, shrugging off bubble fears, the bond market paints a starkly different picture. New AI firms, particularly unproven startups and data center builders, are facing lofty interest rates—up to 3.75 percentage points above peers, translating to roughly 70% more in interest costs—as lenders demand compensation for heightened risks.[3]
Credit spreads have widened notably for companies like Oracle and Meta, with Amazon, Alphabet, and Microsoft seeing milder increases. Investors are piling into credit default swaps (CDS), whose costs have surged since June, reflecting fears over execution risks in these massive CapEx plans.[1] Some freshly issued bonds have already tumbled in price, underscoring post-issuance caution.[3]
“Investors in the A.I.-fueled stock market have largely shrugged off warnings about a tech bubble… But the debt market is telling a different story.”
— Joe Rennison, The New York Times[3]
Leverage Rises, Echoes of Past Booms
A Reuters analysis of over 1,000 tech firms with market caps above $1 billion shows median debt-to-EBITDA ratios climbing to 0.4 by September’s end—nearly double 2020 levels. While not yet at crisis thresholds, the trend indicates debt growing faster than earnings, posing vulnerabilities if AI hype fails to deliver.[2]
Michelle Connell, president of Portia Capital Management, described this as a “structural shift,” driven by rapid tech obsolescence and short chip lifespans requiring constant reinvestment. “Debt-funded AI capex reflects… continuous reinvestment,” she noted, warning of weakening coverage ratios.[2]
Comparisons to the dot-com era are rife, with one analysis questioning if “AI debt [is] heading the world into another year 2000 ‘Dot-Com Boom’.” The parallels lie in speculative fervor, but today’s giants boast profitability and cash buffers—though investors worry about overextension.[3]
| Metric | Amount | Source |
|---|---|---|
| Hyperscaler Debt (2025 YTD) | $121B | BNY Mellon[1] |
| Global Tech Bonds (thru Dec) | $428.3B | Dealogic[2] |
| U.S. Tech Share | $341.8B | Dealogic[2] |
| Median Debt-to-EBITDA | 0.4 | Reuters[2] |
More Borrowing on the Horizon
Wall Street anticipates no slowdown. UBS projects up to $900 billion in new global corporate debt for 2026, while Morgan Stanley and JP Morgan eye $1.5 trillion from tech over the next few years to sustain AI infrastructure builds.[1] This could further strain markets if returns lag.
Despite risks, big tech’s market dominance offers some insulation. “The biggest tech firms are generally profitable, have large cash buffers and… rank among the world’s most valuable,” per analysts—yet the debt market’s caution suggests the AI gold rush carries hidden pitfalls.[2]
Implications for Investors and Economy
For debt investors, the shift demands rigorous scrutiny of AI execution risks, from supply chain bottlenecks to regulatory hurdles. CDS hedging is rising, and spreads may widen further if economic headwinds emerge. Startups like Applied Digital exemplify the squeeze, paying premium rates that could crimp growth.[3]
Broader economy watchers see this as a litmus test for AI’s real-world viability. If CapEx translates to revenue, the debt will prove prescient; if not, a reckoning looms. As 2025 closes with records shattered, the bond market’s sobriety tempers equity euphoria, urging a balanced view of the AI revolution.
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