Tech Giants Borrow Heavily for AI as Market Risks Mount

The world's largest tech firms are borrowing at an unprecedented rate to fund their artificial intelligence ambitions, triggering ripples across global financial markets. Since January, tech sector borrowing has surged to approximately $500 billion, with companies like Google, Meta, Amazon, and Microsoft raising debt to finance AI infrastructure such as chips, servers, and data centers. Goldman Sachs projects this borrowing could escalate to $1.2 trillion by 2027. James Vrachas of Post Oak Group notes that AI now accounts for 25% of all corporate bond issuance, a dramatic increase from just 4% two years ago.

Investors are still eager to lend to these tech giants but are demanding higher returns than before. Meta, for instance, has had to offer over 7% annually, while riskier cloud data center specialists are offering above 9%. This shift in investment preferences is even affecting demand for US government bonds, pushing up borrowing costs for Washington. The 10-year US Treasury bond rate has reached 5.30%, its highest level since 2002, driven by both the AI debt situation and inflation fueled by geopolitical tensions.

Analysts warn of potential risks, including a possible slowdown in AI development or weaker-than-expected revenue growth, which could lead to a market correction. The Bank of England's Financial Policy Committee has highlighted the risk of a sharper correction, particularly if AI adoption falls short of expectations. Oracle, with $125 billion in debt and shrinking cash reserves, is seen as a potential bellwether. Trouble with Oracle's debt could trigger contagion across the entire AI finance sector, according to Mark Malek of Siebert Financial.