Money and Me: Bond Yields Are Surging. Is It Time to Buy?

SPEAKER_1 (0:01)

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Michelle Martin (0:18)

Okay, guess what, it's Bondo'clock hour. AI's enormous appetite for capital is beginning to reshape not just equity markets, but also the corporate bond market. The five biggest tech companies behind the AI buildout, Alphabet, Amazon, Meta, Microsoft, Oracle. They issued roughly $35 billion worth of debt a year between 2020, 2024, and in 2025, that jumped to $93 billion. And by July this year, they'd already issued some $132 billion. So estimates for total AI related debt issuance this year as high as $570 billion. What does this mean for you, the investor? Well, bond investors are starting to get choosy.

The interesting thing is that investors don't necessarily fear these companies will default. They're asking how much AI debt they want to own and how much compensation they should demand for absorbing this extraordinary supply.

So is the bond market beginning to put a price on the risks of the AI boom? Joining us is Thu Ha Chow, head of fixed income Asia at Robeco. Thu Ha, good morning.

Thu Ha Chow (1:18)

Good morning. Thank you for having me.

Michelle Martin (1:20)

Can we start with an understanding of what crosses your desks every day? What goes by your desk?

Thu Ha Chow (1:26)

Because everything from kind of bond market, kind of interest rates, and this is corporate bond supply demand as we talk about, and then of course how that links to equities, equity pricing. So yes, pretty much everything.

Michelle Martin (1:41)

That's just the kind of person we want to talk to about this topic too. So what is the bond market telling us about AI right now that maybe the equity market isn't?

Thu Ha Chow (1:50)

Yeah, I think the bond market has actually started to kind of be worried about the amount of supply that is hitting the market you mentioned there, but also supply from the US Treasury, that all of these supplies coming at the same time, we're having kind of big macro dynamics that may be shrinking demand. For example, I've heard in your show, you talked about the carry trade being unwell. And of course, if the Japanese kind of use got to rise, the Japanese buys, well, may look to buy less US Treasury or even sell some, if they need to defend the currency. So that might reduce demand and at the same time, supply is going up. So those are the dynamics that we all have to watch very carefully, as well as, as you say, the fundamental story that that engaged to and that's what the bond market is beginning to start to show that signs of volatility as it tries to price this risk.

Michelle Martin (2:42)

So we know hyperscaler borrowing could reach 420 billion next year, up around 60% from 2026 estimates. At what point does sheer supply become the dominant consideration for bond investors, regardless of how good the underlying credit is?

Thu Ha Chow (2:57)

Yes, so there has been study by some researchers that say that there is still some one capacity because one of the things that we have with indices is that the more you issue, the more high percentage should remain in index. Of course, then people have to buy you if they have to buy the indices. So some of that will get absorbed, but it might compete away from other stuff. You see, because if we buy one thing, then we might not buy another. So I think investors are demanding a premium because also because they need to diversify. You can't have your, even if you say your hyperscalers are very high credit quality, you can't just put your whole portfolio there. Therefore, the diversification kind of premium that you need to have to hold them will also kind of increase as the supply increase.

Michelle Martin (3:42)

Okay, I want to for a minute look at the spreads because Reuters is reporting that AI-related credit spreads are around 115 basis points, compared with 78 basis points for the broader investment grade market. So we're seeing highly rated AI issuers sometimes offer spreads normally associated with much lower rated companies. Does that create a genuine buying opportunity?

Thu Ha Chow (4:04)

It does in some respect because you say that yes, the ratings were not too worried at the moment because their revenue has been getting to pick up. But I think maybe we want to take it because I think one of your question is how does bonds kind of fit into the supply portfolio. I think traditionally we had looked at bonds, equities, and we kind of allocated currencies, allocated as such. And I think there's something that has dramatically changed given the supply dynamics you talked about. I'm going to quote something here by the Metaca Investment Group study. So they studied, I think 500, I was going to quote this correctly, they kind of almost 500 different institutional investors and they were looking at the whole portfolio, their equity, their infrastructure, their bond portfolio, and they realized AI is everywhere. Because AI risk is coming in through your infrastructure, your data center, AI risk is coming in through your utility bonds because they're expanding for that. AI risk is coming through real estates because some of the real estates associated to this, as well as it's coming through your equity positioning. So when they looked at it, they found, I think, I believe, it was about nearly 800th institution, which 63% identified AI risk. So AI risk is not just in your bond. And so therefore, that becomes a problem because you're like, now, okay, I'm owning AI risk in all different forms. And of course, then you want to diversify from that. That's why the premium starts to have to price in. So yes, it is a buying opportunity, but you must look at that in the context of what else you own in your portfolio.