US computer chip manufacturer Nvidia hit the dollar bond market for $25bn on Tuesday, with a rare foray. Unsurprisingly, the deal — Nvidia’s first since 2021 — flew off the shelves.
AI, for the lack of a better phrase, is so hot right now. The last 12 months have been marked by a rampant increase in market funding from the so-called US hyperscalers and their associates.
These borrowers, with an appetite worthy of Rabelais’ Gargantua, have left almost no corner of the market untapped — senior bonds, private credit, securitization, equity and convertible bonds have fuelled a fourth industrial revolution that consists not of great feats of engineering, but rather grey, air-conditioned slabs housing compouters in the Utah desert.
Demand for these deals has for now kept up the tech titans’ funding appetite. Nvidia’s offering still garnered an $80bn book, despite coming after a run of similar hyperscaler and AI-adjacent deals in the first half of the year, like Amazon’s $37bn behemoth, or Alphabet, Meta and Oracle’s own $20bn-$25bn minnows.
But this corner of the market is becoming heavily concentrated, with each new issue introducing a new benchmark beast into the market.
Between Alphabet, Amazon, Meta, Nvidia and Oracle, investors have gulped down over $130bn of fresh bonds already this year, according to Dealogic. In the 29 years before that, since Oracle issued the quintet’s first bonds in 1997, the five firms had only raised $347bn.
With this year’s tech bonds accounting for almost 35% of the overall dollar issuance so far, almost every investor with one eye on the market must hold them.
At the end of last year, MUFG researchers estimated AI-related sectors made up 18% of the investment grade corporate bond index, making them the biggest component after banks. Given the bonds' size and weighting in indices, not buying them in some form is almost unavoidable.
However, these issuers are heavily interlinked. Alphabet, for instance, has partnered with Oracle, while Amazon is set to buy a million chips from Nvidia by the end of the year. Capital — be it borrowed through bonds or elsewhere — is being shunted around the sector, AI firms nestling funding within each other like a set of Russian dolls.
This close web of capital, however, means the possibility of contagion — if and when it strikes — is high. A problem with one part of the sector could quickly spiral into a wider event. And with AI firms dominating indices and dwarfing the rest of bond supply, any potential overspill could ripple through the market, causing devastating volatility in spreads.
Given the size and weight of these issuers, when one hyperscaler sneezes, the rest of the market might just catch a cold.