Amazon · Oracle · Meta · Wall Street · U.S. Treasury · CNBC Technology
Artificial intelligence may be taking some of the blame for rising bond yields
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Issuance from hyperscalers has surged as the companies look to fund their artificial intelligence buildout.
Key facts
- This year, Alphabet, Amazon, Meta Platforms and Oracle have issued nearly $223 billion in bonds, as of August 20, according to LSEG
- The 30-year Treasury yield hit a 19-year high on Tuesday when it topped 5.33%, before dropping back on Wednesday when the Treasury Department announced it would be stepping up its bond buybacks
- Grabbing attractive yields These days, investors can grab yields anywhere from 4.75% to 8% on hyperscaler bonds, depending on the specific issuer and maturity date, said Dominic Pappalardo, chief
- The total U.S. government debt passed the $40 trillion mark, as of Tuesday, more than doubling in a decade
Summary
Artificial intelligence may be taking some of the blame for rising bond yields, but it is also creating an opportunity for income investors. This year, Alphabet, Amazon, Meta Platforms and Oracle have issued nearly $223 billion in bonds, as of August 20, according to LSEG. The 30-year Treasury yield hit a 19-year high on Tuesday when it topped 5.33%, before dropping back on Wednesday when the Treasury Department announced it would be stepping up its bond buybacks. Wall Street has also blamed the ballooning deficit and rising inflation fears. Grabbing attractive yields These days, investors can grab yields anywhere from 4.75% to 8% on hyperscaler bonds, depending on the specific issuer and maturity date, said Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth. Leslie Falconio, head of taxable fixed income strategy in UBS Americas' chief investment office, believes there is value to be found in high-quality bonds from large hyperscalers.
When the spread widens, it signals investors demand higher compensation for taking risks. "So the results two to three years down the line might be different and diverse in the same cohort of AI infrastructure debt that is getting issued. " He estimates investors can earn about 6.5% for long-end bonds issued by investment grade AI leaders. Finding opportunities UBS' Falconio is sticking with larger, high-quality issuers that have good cash flows and solid balance sheets, and holds them for the long term. In addition, they consider whether there is a structure figured into the deal that has a tie-in for the off-taker to pay up if they don't take on the lease. About 8% of the investment-grade index are in such assets, Falconio pointed out.