Data centers run on debt. That was a problem for bonds this year - and it's only going to get worse.

By Joy Wiltermuth

AI debt issuance this year overwhelmed investor portfolios, and has disappointed from a performance perspective. The funding need won't get any better with Democrats in control of Congress.

The AI buildout was on the ballot in the midterm elections. The funding blitz on Wall Street could slow, but isn't likely to stop.

The copious amounts of debt rolling out to finance the artificial-intelligence buildout has rattled the bond market this year, as borrowers have needed to pay higher interest rates to find takers for all the supply.

Don't expect the midterm election results to change that. As Democrats take control of Congress in January, some on Wall Street think any slowdown in the building of data centers could reduce the need for AI builders to borrow. That could reduce bond supply, and provide some relief to bonds now underwater in portfolios.

Less supply could boost the appeal of all those existing AI bonds, and their prices. But a recent report from Goldman Sachs says not to count on a smaller borrowing need.

AI debt issuance this year smashed Wall Street's supply expectations, swamped investor portfolios and disappointed from a performance perspective.

With Meta Platforms (META), Microsoft (MSFT), Oracle (ORCL) and others borrowing another $67 billion since late October, Goldman Sachs's credit strategy team tallied AI "hyperscaler" debt supply at $296 billion already this year, in a Thursday report. That was well above the bank's $250 billion forecast for 2026.

Another $440 billion in hyperscaler debt supply is now expected in 2027, albeit with access to capital markets "to be somewhat uneven across issuers and highly dependent on the market tone," the Goldman team, led Amanda Lynam, wrote in the report.

Angst around AI caught up with tech stocks after Tuesday's midterm elections swept Democrats to power - not just in Congress, but in many traditional Republican strongholds in state and local government, including in Texas.

The S&P 500 SPX and the Nasdaq Composite COMP both saw a record wipeout in market value on Thursday, but rose to recover some of those losses Friday.

"It won't change the overall endgame - just the pace will likely slow a bit," Oliver Chambers, a senior portfolio manager at Clark Capital, said Friday about AI debt supply and the election results.

Debt financing - now the lifeblood of the AI buildout -could start at a more moderate pace in the first quarter of 2027, as Wall Street tries to figure out "the rules of the road" under the new political landscape, Chambers said.

He isn't expecting the endgame to change in terms of the total number of data centers, but only potentially delay the pace of construction and spending, which could give tech giants' revenues some time to "catch up and expand."

Chambers said recent "pro-business" comments from Texas Governor-elect Gina Hinojos also were a positive, given the state's large data-center footprint.

Denny Fish, Janus Henderson's head of technology research and a portfolio manager, said in emailed comments Friday that he expects the AI buildout to continue, "but the locations in which it will be concentrated, and the pace of the rollout, are now in question."

Meanwhile, there's also hope that more infrastructure financing will be shouldered outside of the corporate bond market. AI exposure increased to 5.14% of the investment-grade corporate index as of late October, up from 2.73% at the start of 2025, according to BofA Global data. That makes it hard for any bond fund to avoid altogether.

The supply deluge and volatility this year have pressured investment-grade AI corporate bonds, which have been trading at a large premium to the rest of the market. The difference was about 148 basis points above the risk-free Treasury rate on Thursday, versus 77 basis points for the rest of the market, according to BofA Global. (One basis point is 0.01 percentage point.)

That means investors have been demanding more compensation to offset perceived AI risks.

Next year, BofA Global expects AI-related issuance that's funded in credit markets to peak at about $685 billion, rising about 31% from this year. Yet the yearly increase would come almost entirely from private credit, which tends to be unrated, according to BofA's latest estimates.

For bond pickers like Chambers, 2026 has been all about investors drinking from a fire hose of supply as the hyperscalers have raced to borrow - but the path ahead looks to be more about differentiating the winners and losers of AI, he said.

Related: Nvidia, AMD and other chip stocks rebound. Is the 'violent' AI selloff over?

-Joy Wiltermuth

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11-06-26 1637ET