MW The almighty bond market says the AI bubble won't pop anytime soon

By Emily Bary and Tomi Kilgore

Recent Meta and Alphabet bond deals saw strong demand: 'If there was a disaster brewing, that wouldn't have happened'

AI might be a bubble, but it could inflate for several more years, according to one expert.

Investors looking for a temperature check on the health of big artificial-intelligence spenders can likely find comfort in the bond market, with some seeing signs the boom could continue for years.

If there were any actual trouble brewing in the AI trade, it would most likely start showing up in credit markets, which are usually much more sensitive to any liquidity speed bumps than equity markets. And the good news for AI investors is that bond deals from Big Tech companies have been in high demand, suggesting that investors are confident in the ability of those companies to monetize AI and satisfy their obligations.

Recent developments in the bond market might seem to be flashing mixed signals, as Big Tech bonds sold off in the middle of last week, underperforming the broader corporate debt market and bucking momentum in equity markets that had stocks trading near record levels. But experts don't attribute that pressure on "Magnificent Seven" bonds to concerns about AI players. Instead, they're focusing on some strong recent offerings in the market.

For instance, Meta Platforms Inc. (META) last Thursday conducted a massive, $30 billion bond offering, which tied for the fifth-largest investment-grade corporate offering ever. The deal came even as Big Tech bonds were selling off - and while Meta did have to pay out slightly higher yields to attract investors, the offering still attracted a record amount of bids for a corporate offering, at $125 billion.

The bids represented 4.2 times the offering amount, which was above the average oversubscription for IG corporate offerings of 3.9%, according to Brian Reynolds, chief market strategist at Reynolds Strategy, who cited Bloomberg data.

If that wasn't enough to dispel "disaster" concerns, the strong demand seen for the large bond issuance by Alphabet $(GOOGL)$ - it was more than five times oversubscribed - just days after Meta's offering, acts as confirmation that there's plenty of liquidity to spare.

"If there was a disaster brewing, that wouldn't have happened," Reynolds said.

Large technology companies have been issuing bonds to fund their AI build-outs and to fund share repurchases, but they're doing that more out of opportunism than necessity, according to Gimme Credit senior bond analyst Dave Novosel.

"It's not as if a company like Alphabet has to go into the debt markets" to cover AI spending, he said, as the Google parent company and its rivals could simply pay for their AI ambitions through their strong free cash flow. By turning to bonds, the companies are "just taking advantage of a good market."

The Google parent sold $17.5 billion worth of bonds on Monday, and reportedly received $90 billion in bids. What stood out about the demand, Reynolds said, was that it was even strong for the bonds due 2075, a duration unheard of for a technology company. The longest duration from recent "unusual" offerings by Oracle ORCL and Meta was 40 years. The average duration of investment-grade corporate debt is just 10.4 years, Reynolds said.

Gimme Credit's Novosel added that the 50-year maturities are striking for a technology company because it's a "stretch" to bet on what tech will be relevant decades down the line. While the long duration surprised him, he thinks Alphabet's management must have sensed "enough investor demand."

The yield offered on the 2075 bonds was just 109 basis points, or 1.09 percentage points, over the equivalent yields of U.S. Treasury notes.

If there were any indication of concern among investors, Alphabet would have had to offer a much higher interest rate to attract buyers of 50-year paper. But that spread over Treasurys was just 45 basis points wider than what Alphabet's 10-year bonds were paying. And in comparison, during last week's tech-bond rout, Meta's 40-year bonds yielded 110 basis points over Treasurys.

What the bond action means for stocks

When extrapolating from bond-market moves, it's important to understand how Big Tech notes stack up on a relative basis.

Bonds from technology companies can be more volatile than those from other sectors, because while the technology sector has the largest weighting in the S&P 500 index SPX at more than 30%, Reynolds said it only makes up about 6% of the benchmark investment-grade corporate bond index.

At the same time, Novosel said that with companies like Oracle, Meta and Alphabet issuing so much new debt, "it kind of loses some of the scarcity value," meaning market participants will want some concessions in order to "hold this much paper."

And while it could have been tempting to see last week's bond action as a referendum on recent Big Tech earnings commentary, it's worth noting that those reports largely coincided with the Federal Reserve's surprising indication that another rate cut in December wasn't guaranteed. That prompted many pre-Fed buyers to unwind their trades.

Why the AI bubble can last for years

Public pension funds, fueled by tax-receipt inflows, and insurance companies are among the biggest buyers of investment-grade corporate bonds, as they look to pick up yields that are higher than their income growth mandates.

Pensions are seeing record amounts of tax inflows, Reynolds said, so demand for corporate debt should continue to grow. So as long as there is no concern that interest payments will be made, Reynolds believes demand will continue to set records. That in turn should support long-term gains for the stock market, as proceeds from opportunistic bond sales are used to fund AI investments and stock buybacks.

The Global X Artificial Intelligence & Technology ETF AIQ has soared 160% over the past three years, while the S&P 500 has advanced 78%. Given how much AI stocks have already rallied, and the increasing attention that Big Tech bonds are receiving, Reynolds said there is an AI bubble.

But when comparing the current situation to the 1990s dot-com bubble, he believes the AI bubble can continue to inflate for another three to five years. Basically, Reynolds believes history can repeat itself.

In late 1996, then-Federal Reserve Chairman Alan Greenspan fueled fears that the dot-com bubble would pop when he gave his infamous "irrational exuberance" speech. But that bubble continued to inflate for more than three years, as the tech-weighted market indexes didn't peak until March 2000.

"We remind people that bubbles tend to pop when debt that is perceived to be safe runs into trouble," Reynolds wrote in a recent note to clients.

And there's still no evidence to suggest there is any trouble brewing.

When should you worry?

First, the flood of tech corporate debt needs to reach tsunami proportions. At roughly 6%, tech bonds represent about double the weighting in the benchmark investment-grade bond index as when the dot-com bubble popped. But the current weighting is slightly less than it was three years ago. In comparison, the weighting had climbed to 3% in 2000 from about 2% in late 1996.

Reynolds said the weighting of tech bonds will increase, "but we would not be concerned until it crosses 10%."

He also noted that the spreads between tech bond yields and those of corresponding U.S. Treasurys have narrowed. When that happens, it means investors see less risk, because they are receiving less of a premium than supposedly no-risk Treasurys.

As of Oct. 6, the tech bond IG index spread is a little more than 50 basis points, compared with a little under 50 basis points a few weeks after then-Fed Chair Greenspan's "irrational exuberance" speech.

That's why Reynolds isn't worried yet.

The current average spread for investment-grade corporate bond yields above Treasurys is a little more than 85 basis points. Reynolds said he wouldn't become concerned unless the spread gaps out to more than 150 basis points, where they were when the dot-com bubble popped.

-Emily Bary -Tomi Kilgore

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

November 06, 2025 14:24 ET (19:24 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.