Tech giants borrow $500 billion for AI as US Treasury yields rise

The rapid expansion of artificial intelligence is driving the world's largest tech companies to take on unprecedented levels of debt. Since January, borrowing in the tech sector has surged to around $500 billion, as firms like Google, Meta, Amazon, and Microsoft raise funds to finance AI infrastructure such as chips, servers, and data centers. This borrowing spree has reached 25% of all corporate bond issuance, up from just 4% two years ago, according to Chris Della Fave of Post Oak Group. Goldman Sachs predicts this trend will accelerate, with borrowing potentially hitting $1.2 trillion by 2027.

Investors are still eager to lend to these tech giants, but they are demanding higher returns than before. Meta, for instance, has had to offer over 7% annually, while riskier cloud data center specialists have gone above 9%. This increased borrowing is even affecting the demand for US government bonds, pushing up borrowing costs for the federal government. The 10-year US Treasury yield has risen to above 5.30%, its highest level since 2002, due to a combination of inflation, geopolitical tensions, and the AI debt surge.

Analysts warn of potential risks, including a sharp correction if the AI boom slows down or if earnings expectations are not met. The Bank of England's Financial Policy Committee has highlighted the possibility of a sharper correction, particularly if concerns about AI development or adoption arise. The Nasdaq index, which is heavily weighted with tech stocks, fell nearly 7% in July amid growing skepticism about the AI boom. Oracle, with $125 billion in debt and shrinking cash reserves, is seen as a potential bellwether for the sector, with trouble at the company possibly triggering broader financial contagion.