DoubleLine wary of AI funding wave that could alter US high-grade debt market

By Davide Barbuscia

NEW YORK (Reuters) -A rush of bond sales by major tech firms to fund artificial intelligence expansion is creating a high-stakes bet for the $9 trillion U.S. corporate bond market, prompting caution from prominent investors like DoubleLine over the sector's growing debt load.

Over the past two months, four major cloud and AI "hyperscalers" have sold nearly $90 billion in public bonds. Google?owner Alphabet sold $25 billion in bonds, Meta $30 billion, Oracle $18 billion and Amazon (AMZN), the most recent, $15 billion.?

Several analysts forecast higher amounts of hyperscaler debt issuance next year as big tech firms race to finance AI-ready data centers. High-grade bond markets may need to absorb $1.5 trillion of AI data center bond sales over the next five years, with that type of debt potentially representing over 20% of the investment-grade bond market by 2030, J.P. Morgan analysts estimated recently.

"The potential for this data center capacity spend to come to the investment-grade market means you could have a significant re-levering in a new sector, and it could become a material risk to the high-grade market," said Robert Cohen, director of global developed credit at DoubleLine, a bond-focused investment firm managing $90 billion in assets.

"You've got a large new sector that's clearly unproven, and that would change the risk profile of investment-grade credit quite substantially from where it is today, that's my concern," he said in an interview.

Rising debt at tech companies has added a new layer of concern to broader financial markets that, despite being fueled by the promise of high AI returns, remain wary that the technology has yet to deliver the profits needed to justify such large capital spending.

Meanwhile, although U.S. investment-grade credit spreads remain near historic lows, they have edged wider in recent weeks, reflecting growing unease over the surge of new bond supply coming to market. Spreads widened to 86 basis points on Friday, their widest since the end of June, the ICE BofA US Corporate Index showed.

The U.S. investment-grade bond market is worth about $9.2 trillion, according to the ICE BofA US Corporate Index.

Cohen said the corporate bond market remained in good shape due to several factors including a strong economy, healthy corporate balance sheets, lower interest rates than over the past few years, and expectations of an accommodative Federal Reserve going forward.?

But, while not an imminent risk, he said he was "on alert" about bond issues from tech companies flooding the market and cautious about adding exposure to their debt.

"They are building capacity to provide support for, ultimately, a product where the end use is not super clear," he said.?

(Reporting by Davide Barbuscia; Editing by Lisa Shumaker)