The wave of AI debt issuance is likely to break the corporate bond bull market! Tech giants may raise $400 billion next year, BNP Paribas warns of an imbalance between supply and demand

The Zhitong Finance App learned that BNP Paribas warned that the corporate bond bull market that has continued for many years may be nearing a turning point. As technology giants such as Amazon (AMZN.US), Alphabet (GOOGL.US, GOOGG.US), and Microsoft (MSFT.US) invest huge sums of money in artificial intelligence and data center construction, the issuance of AI-related bonds is rapidly increasing. The bank estimates that the bond issuance scale of large cloud computing companies alone may reach about 400 billion US dollars next year, and expanding supply may eventually become an important factor in ending this round of credit bond bullish market.

In its latest report, BNP Paribas analyzed the possible path to the “end of the bull market.” The bank believes that in the short term, investors will still be able to absorb the increasing bond issuance by technology companies, but supply pressure will become more prominent in the next few quarters, and there is currently no clear source of demand that can match the growth rate of bond supply.

Analysts such as Viktor Hjort, head of global credit strategy at BNP Paribas, wrote, “AI is driving the credit market from scarce bonds to abundant bonds. There is no clear demand driver to keep up with the supply growth trend in the next few quarters.”

Since this year, hyperscale cloud computing companies such as Amazon, Alphabet, and Microsoft have raised billions of dollars through the bond market, and BNP Paribas anticipates that more financing needs will pour into the market in the future. The bank estimates that the bond issuance scale of these large technology companies may reach about 400 billion US dollars next year. Although high interest rates are limiting investment and financing activities in other areas of the US economy, at least for now, the rise in financing costs does not seem to have significantly weakened the tech giants' willingness to spend on AI.

This judgment also means a marked shift in BNP Paribas's view of the corporate credit market. The bank's analysts said that in the past three years, the credit bond market has always been characterized by high yields, strong defensive properties, and insufficient supply. Together, these factors have supported the strong performance of corporate bonds.

But now that pattern is changing. As corporate debt valuations are already at a high level, monetary policy is further tightened, and AI capital expenditure brings a large amount of additional financing needs, BNP Paribas expects credit spreads to widen again. The bank expects that by the end of 2026, interest spreads on Euro investment-grade corporate bonds will increase by about 6 basis points, while interest spreads on US dollar investment-grade corporate bonds may increase by about 7 basis points.

What is more noteworthy is that AI corporate financing is not the only source of an increase in bond supply. BNP Paribas predicts that the total net supply of the fixed income market will reach a record 3.7 trillion US dollars next year, which means that corporate bonds will need to compete for investors' capital as large as the supply of government bonds.

An analyst at BNP Paribas said, “At a time when government bonds are also oversupplied, credit bonds are also becoming oversupplied. AI is accelerating the transition from the middle to late stages of the economic and credit cycle.”

This change may become an important source of pressure on the corporate bond market in the future. If investors need to absorb a large number of government bonds and AI-related corporate bonds issued by technology companies at the same time, in order to attract sufficient capital, new bonds may need to provide higher yields or larger credit spreads, putting pressure on existing bond valuations.

BNP Paribas isn't the only Wall Street institution warning about the wave of AI financing. As technology companies continue to increase capital spending on data centers, chips, and other AI infrastructure, the market has begun to pay attention to how large the new supply can be sustained by bond investors.

Last month, Matthias Reschke, head of European investment-grade finance at J.P. Morgan Chase, said that large-scale AI-related bond issuance is testing investors' affordability.

“We have no doubt that these bonds will eventually sell; the problem is simply the price,” said Reschke. In other words, if bond supply continues to grow rapidly, tech companies may have to offer higher yields to attract enough buyers.

Overall, BNP Paribas believes that the AI investment boom is having a very different impact on the credit market than on the stock market. On the one hand, huge AI capital expenditure continues to support growth expectations in the technology industry; on the other hand, the huge supply of bonds generated to finance these investments may gradually become a source of pressure on the corporate bond market.

As the potential debt issuance scale of large technology companies reaches about 400 billion US dollars next year, and the net supply of the entire fixed income market is expected to set a record of 3.7 trillion US dollars, the “insufficient supply” logic that has supported the corporate bond bull market in the past few years is being reversed. For credit bond investors, the next key question may no longer be whether the market can absorb these bonds, but rather how high yields and how large credit spreads are needed to absorb the ever-expanding supply of debt in the AI era.