Share the Article
Print the Article
Download the PDF
AI-related bonds could push Treasury yields up in funding arms race
AI-related bond supply is reshaping yields, credit curves, and portfolio risks.
September 2026, Fixed Income
Key Insights
As companies rush to bring bond issues to market to fund their AI-related spending, this new debt is competing with government bonds for investor demand.
Supply and the repricing of duration risk are likely to pressure hyperscaler bonds well before conventional credit deterioration becomes an issue.
We are finding opportunities away from straightforward long-dated unsecured hyperscaler bonds, such as in investment-grade data center financings.
Like everything related to artificial intelligence, the recent flood of debt issuance to fund AI capex is receiving plenty of attention in the financial media. But the new AI capex bonds are only the latest entries in the increasingly crowded arms race to raise funding in the fixed income markets.
Governments around the world had already been selling more and more new bonds. This trend started when the COVID pandemic initially caused much of the global economy to shut down in early 2020 and governments responded with massive fiscal support. So as companies rush to bring bond issues to market to fund their AI-related spending, this new debt (particularly from higher-quality issuers) is competing with government bonds for investor demand.
This should eventually help push yields on high-quality government bonds (like U.S. Treasuries) higher simply as a result of the booming supply. And bonds with credit risk, including hyperscaler and data center debt, should see wider credit spreads, increasing their all-in yields as well.
I recently discussed the impact of the flood of AI-related bond supply on the economy and the broader fixed income markets, as well as the details and risks of these new issues, with Steve Boothe, our head of global investment-grade fixed income, and Mark Stodden, a credit analyst who focuses on the technology sector.
Arif: How do you see AI capex, and the bond issuance funding it, feeding into long-term economic growth?
Steve: AI capex is an important incremental growth engine for the U.S. economy. In the near term, spending on data centers, chips, power, and related infrastructure is directly supporting investment and growth.
The longer-term question is whether the productivity gains and future cash flows justify the amount of capital being deployed. If they do, the cycle can become self-reinforcing, supporting higher equity valuations, tighter credit spreads, and strong cash flows that support additional investment, which supports growth and valuations and higher real yields. But if returns disappoint or the cost of capital rises, capex could slow quickly.
Arif: Is the flood of AI-related issuance affecting corporate credit curves?
Steve: Absolutely. A disproportionate amount of incremental investment-grade supply is being placed into the long end of the market, contributing to steeper credit curves. Approximately one-third of year-to-date investment grade corporate supply has been in the long end of the curve,1 with an outsize contribution from AI-related issuers.
I currently see this as a supply and relative valuation issue, not a broad deterioration in credit quality. Long duration investors are being asked to absorb heavy Treasury supply at the same time that hyperscalers and other AI-related borrowers are issuing large amounts of long-dated debt. The clearing price for duration must adjust.
Arif: What is the best way to think about portfolio construction when adding exposure to AI-related bonds?
Mark: A portfolio could accumulate sizable exposure to AI-related risk simply through positions in individually attractive deals—without making a thematic allocation decision. The question is not how much AI to own in absolute terms, but how much active AI risk a portfolio should take relative to its benchmark.
The pace of AI credit formation is even more important for portfolio construction. AI could account for roughly half of the growth in the broader U.S. dollar-denominated credit opportunity set through 2029. This reinforces the need to plan AI exposure deliberately and treat new transactions as competing uses of a portfolio-specific risk budget.
Arif: Do you anticipate that hyperscaler credit quality will deteriorate?
Steve: No. Most hyperscalers still have some of the strongest balance sheets in the corporate market. I think supply and the repricing of duration risk will pressure their bonds well before conventional credit deterioration becomes an issue.
The more interesting question is what these balance sheets will be like three to five years from now if AI remains this capital intensive. Investors need to look beyond reported debt and begin to consider capacity commitments, guarantees, and other contingent liabilities.
Arif: Where do you see risks in the AI credit cycle?
Mark: The market looks set to stay in the current mode of booming AI demand with scarce compute supply for the near term, but the key risk in the transition to the next part of the AI cycle is that compute will become more abundant. If compute supply eventually outstrips demand while AI consumption remains strong, the values of bonds issued by infrastructure providers and technology suppliers could suffer.
Arif: Where do you find value in the new AI-related supply?
Steve: We are finding more interesting opportunities away from straightforward long-dated unsecured hyperscaler bonds, such as in investment-grade data center and infrastructure financings where investors are being paid for complexity.
But these deals are very idiosyncratic and require a differentiated underwriting process relative to vanilla unsecured risk. We care about the quality of the tenant, contract terms, leverage, amortization, construction risk, power availability, geography, and refinancing risk.
Mark: Even in the risk scenario I described where compute capacity catches up to demand, the credit quality of data center deals with high-quality tenants and strategically important sites should still hold up. But we would likely stop adding to these positions if we anticipated this scenario developing. One area where we would investigate adding is bonds issued by AI labs. We have limited exposure today but could build positions if input costs fall even as demand remains high.
1 Data is through August 31, 2026. Source: J.P. Morgan
T. Rowe Price cautions that economic estimates and forward‑looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual outcomes could differ materially from those anticipated in estimates and forward‑looking statements, and future results could differ materially from historical performance. The information presented herein is shown for illustrative, informational purposes only. Any historical data used as a basis for analysis is based on information gathered by T. Rowe Price and from third‑party sources that have not been verified. Forecasts are based on subjective estimates about market environments that may never occur. Any forward‑looking statements speak only as of the date they are made. T. Rowe Price assumes no duty to, and does not undertake to, update forward‑looking statements.
Investment Risks: Fixed income securities are subject to credit risk, liquidity risk, call risk, and interest rate risk. As interest rates rise, bond prices generally fall. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences.
This material is being furnished for informational and/or marketing purposes only and does not constitute an offer, recommendation, advice, or solicitation to sell or buy any security.
Prospective investors should seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services.
Past performance is not a guarantee or a reliable indicator of future results. All investments involve risk, including possible loss of principal.
Information presented has been obtained from sources believed to be reliable, however, we cannot guarantee the accuracy or completeness. The views contained herein are those of the author(s), are as of September 22, 2026, are subject to change, and may differ from the views of other T. Rowe Price Group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
All charts and tables are shown for illustrative purposes only. Actual future outcomes may differ materially from any estimates or forward‑looking statements provided.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
Issued in the USA by T. Rowe Price Investment Services, Inc., distributor and T. Rowe Price Associates, Inc., investment adviser, 1307 Point Street, Baltimore, MD 21231, which are regulated by the Financial Industry Regulatory Authority and the U.S. Securities and Exchange Commission, respectively.