🚨 Big Tech’s AI Spending Spree Sparks Debt Market Frenzy

The race to dominate artificial intelligence is not just shaking up tech stock valuations—it’s rattling the corporate debt market. Investors and banks are growing wary that the biggest tech companies are borrowing at unprecedented levels to fund AI projects, triggering a surge in demand for credit derivatives.

The likes of Alphabet Inc. and Meta Platforms are piling on debt at a scale few could have imagined. Alphabet recently sold $32 billion in bonds across three currencies—including an ultra-rare 100-year note—drawing orders multiples higher than supply in under 24 hours. Meanwhile, Meta’s debt-linked derivatives are among the most actively traded US contracts outside the financial sector.

Morgan Stanley predicts that hyperscalers’ borrowing will reach $400 billion in 2026, up from $165 billion in 2025, with capital expenditures for AI pushing Alphabet’s spending to $185 billion alone.

“This hyperscaler thing is just so ginormous and there’s so much more to come,” said Gregory Peters, warning that investors should protect themselves against potential overexposure.

Credit derivatives—financial tools that allow banks and investors to hedge against corporate defaults—have seen explosive growth in popularity among tech-heavy issuers. Contracts that barely existed a year ago are now some of the most traded instruments tied to high-grade Big Tech debt.

Dealers now quote multiple hyperscaler CDS contracts, and some are even offering basket derivatives covering multiple tech giants, mimicking growing cash bond portfolios.

The size and speed of tech borrowing is forcing banks underwriting these loans to protect themselves. As projects are funded rapidly, distribution periods for these loans—typically three months—could extend to nine or even twelve months, creating a need for hedges in the CDS market, explained Matt McQueen.

Wall Street dealers are rushing to meet the surging demand for targeted protection. Hedge funds are also capitalizing on the opportunity, selling CDS to banks while betting that these tech giants, with trillion-dollar market caps, are likely to outperform under most scenarios.

Despite low leverage and tight bond spreads, some investors are concerned that the debt explosion could stress credit profiles if AI investments fail to generate expected returns. Rory Sandilands says his book of CDS trades has grown as he anticipates higher potential credit risk among hyperscalers.

Others, like London hedge fund Altana Wealth, have already started buying protection against defaults, with CDS costs on Oracle rising from 50 basis points to 160 basis points within a year—a clear sign that markets are re-pricing risk in real time.

Corporate borrowing isn’t limited to software giants. Projects building out AI-capable data centers for Nvidia and Oracle are issuing multi-billion-dollar bonds. One recent junk bond deal for an AI-focused data center drew $14 billion in orders, quadruple the amount offered.

Lenders, banks, and hedge funds are quickly adapting, creating new financial products to handle the surge in speculative-grade tech debt.

The AI arms race is now a credit market story as much as a tech story. As these hyperscalers pile on debt to secure their place in AI, investors must ask:

For now, demand for protection is high, trading is frenzied, and Wall Street is watching closely—because if the tech giants stumble, the ripple effects could reverberate far beyond Silicon Valley.