A historic bond issuance frenzy driven by the artificial intelligence arms race is pushing the global investment-grade bond market to its limits. On July 13 local time, US semiconductor stocks and AI concept shares suffered a broad rout, with the Nasdaq Index once again losing its 50-day moving average. Behind the stock market turmoil, an even more unsettling signal is emerging: Wall Street bond trading desks have begun using the word "carnage" to describe current market absorption capacity, meaning the critical link supporting AI capital expenditure—low-cost debt financing—is facing an unprecedented test.
Goldman Sachs investment-grade bond trader Jeffrey Papai stated bluntly in his latest report that the $75 billion in AI-related bond issuance over the past month has left the market "struggling to digest," with the AI bond basket he tracks widening by 22 basis points in a single week. More alarmingly, market absorption capacity is shrinking rapidly: where previously over $75 billion in supply was needed to stress the market, now just $25 billion is enough to put the market "on the defensive." Goldman Sachs derivatives trading head Brian Garrett also confirmed that stress levels on the credit trading desk have surpassed those in the equity volatility department for the first time in years.
The Debt Snowball Rolls Toward Its Limit
The traditional logic chain of the AI trade is: tech giants borrow, pour money into building data centers, drive computing power demand, and semiconductor and AI stocks rise. Now, the first link in this chain is loosening. According to The Wall Street Journal, six companies categorized by the market as "AI hyperscalers"—Alphabet (GOOGL), Amazon (AMZN), Meta (META), Oracle (ORCL), Nvidia (NVDA), and SpaceX—have cumulatively issued approximately $244 billion in bonds in global debt markets this year, more than doubling last year's total of $108 billion and representing over 14 times the $17 billion issued in 2024.
Data from Morgan Stanley shows that the overall leverage ratio of hyperscalers has surged from 0.9x in the third quarter of 2025 to 1.8x currently, doubling in just over two quarters, surpassing the leverage level of the entire energy sector, and continuing to climb at a pace of roughly 0.3x per quarter. In terms of market share, five companies—Amazon, Meta, Google (GOOGL), Microsoft (MSFT), and Oracle—now account for 4% of the entire US dollar investment-grade bond index. On a duration-weighted basis, the six major hyperscalers plus three major chip companies now represent 9% of the index.
Goldman Sachs credit strategy head Amanda Lyman noted that even if hyperscaler debt levels were raised to be comparable with large US banks, it would theoretically only free up about $510 billion in incremental debt capacity. However, Goldman Sachs equity research teams project that the five major hyperscalers will collectively spend $5.8 trillion on AI capital expenditure from fiscal 2025 to 2030. Papai further revealed in his report that the proportion of AI-related bond supply relative to the overall investment-grade market has jumped from approximately 1% in 2024 to roughly 18% in the first half of 2026, and for long-duration issuance of 15 years or more, this proportion reaches as high as 42%.
The supply-side deluge has overwhelmed investors. Amazon completed a $37 billion bond issuance in March this year (the fourth-largest single issuance in US corporate bond history) and returned with another $25 billion issuance in July; SpaceX knocked on the market's door with a $25 billion bond just days after its IPO. However, the secondary market's reaction quickly turned cold. According to MarketAxess data, Alphabet's 10-year bond spread widened by 0.12 percentage points last week, Meta's 10-year bond spread rose by 0.16 percentage points, while the overall investment-grade bond average spread edged up only 0.02 percentage points over the same period.
Investor caution stems not from concerns about corporate credit quality, but from fatigue with this seemingly endless arms race. Travis King, head of investment-grade corporate bonds at Voya Investment Management, said: "Everyone knows there's a lot more paper coming, so no one dares to buy with full conviction; everyone wants to leave some room for the next deal." Ryan Jungk, co-head of investment-grade corporate bonds at Newfleet Asset Management, put it bluntly: "For us, this is the number one issue; but for them, it's just a casual 'oh, by the way, we tapped the bond market.' They don't care if they flood our market."
This sentiment is particularly evident in subscription ratios. Amazon's July bond issuance had a subscription ratio of about 2.5x, well below the 3.2x seen during the March boom period; peak subscription demand was approximately $62 billion, only half of the March level. The market broadly believes that if the subscription ratio falls below 2x, issuance will face material difficulties. SpaceX's inaugural 30-year bond issuance was hit particularly hard, with its yield climbing from 6.65% at issuance to 7.3%, and its spread over US Treasuries widening from 1.65 percentage points to 2.05 percentage points, meaning investors who bought on day one are already sitting on roughly 5% in paper losses.
The Transmission Chain from Bond Market to Stock Market
Cracks in the bond market are spreading to equities. Papai acknowledged that for the market to digest the next wave of supply, issuers need to slow their pace, alter issuance structures, have private credit absorb a larger share, and see bond prices fall further to attract new buyers. But he also pointed out the inherent contradiction in this logic: once an AI bond sell-off unfolds in full, it will directly impact the stock market and potentially spread to the broader investment-grade market.
Apollo Chief Economist Torsten Slok issued an even sterner warning. He noted that AI is currently the sole pillar supporting the economy and markets, and when so many bets are placed on so few companies, if returns take longer than expected to materialize, this is not just an industry problem—it could tip the economy into recession and push the S&P 500 into a correction. Slok also emphasized that token prices continue to decline, and Chinese models' share of the most commonly used models globally, as well as token usage, have already surpassed their US counterparts, further compressing the free cash flow outlook for hyperscalers.
Bank of America Chief Investment Officer Michael Hartnett listed "AI capex cuts" as the biggest market tail risk and outlined the trigger path: bond market "vigilantes" cut off liquidity supply to hyperscalers, forcing them to turn to equity financing and layoffs—Meta, Microsoft, and Amazon have already cut 13%, 10%, and 9% of their workforces, respectively.
The Narrative's Supporting Power Is Weakening
This is not the first time the AI bond market has approached a tipping point. In early May 2026, the Financial Times reported that banks including JPMorgan, Morgan Stanley, and SMBC were seeking ways to transfer data center-related debt risk to a broader investor base, as core buyers had begun to resist AI bond supply. At that time, Goldman Sachs, roughly 48 hours after the report was published, quickly rolled out its "Decoding the Agentic Economy" report, predicting that agentic AI would drive a significant increase in LLM profit margins. This narrative shift swiftly calmed market tensions and spawned a new, even larger wave of bond issuance.
Now, when Goldman Sachs' own credit trading desk is calling "carnage," it means the supporting power of this round of narrative is weakening. Papai concluded his report by stating that in the short term, the AI bond complex may get a temporary reprieve as spreads have already adjusted somewhat and the issuance window approaches the earnings blackout period, but "in the medium to long term, given the supply outlook, we expect further underperformance," and recommended investors hold credit volatility positions to hedge against the possibility of broader market "contamination."
Bond market pressure on the day also came from another direction. Federal Reserve Governor Christopher Waller's speech in New York directly pushed up rate hike expectations, as he explicitly stated that if core inflation data remains persistently hot, the FOMC will need to consider tightening monetary policy in the near term. The 2-year Treasury yield rose 6 basis points on the day, and the probability of a July rate hike surged to nearly 50%. Meanwhile, US-Iran tensions drove WTI crude oil prices up nearly 9% in a single day, approaching $78 per barrel, further reinforcing the bond market's hawkish logic.
BTIG analyst Krinsky noted that the 10-year real interest rate has risen to its highest level since April 2025, climbing from 2.11% at the end of June to 2.34%. He assesses that if the real rate quickly breaks above 2.40%, it will be sufficient to cause a broader shock to equities. Krinsky outlined three scenarios and their probabilities: rotation continues (40%), rotation reverses (20%), and rotation fizzles out with a broad sell-off (40%). He specifically noted that the probability of the third scenario "has risen significantly today."
The Race from Debt Bubble to Equity Handoff
As borrowing costs continue to climb, some tech giants have already begun attempting to switch financing paths. Alphabet completed the largest equity financing in US corporate history in June this year, an $84.75 billion deal including a $10 billion private placement to Berkshire Hathaway, $18 billion in public offerings of Class A and Class C shares, $16.75 billion in mandatory convertible preferred stock, and a $40 billion at-the-market (ATM) program. Barclays predicts that if AI investment continues to expand, the likelihood of Meta, Microsoft, and Amazon issuing equity or equity-linked securities will rise significantly.
However, the signaling effect of equity financing may instead reinforce market expectations of even larger AI spending. As the Alphabet case demonstrates, investors interpreted it as a sign that the company might invest even more in AI and need to take on more debt, thus providing limited uplift to the bond market. Meanwhile, the massive stock buybacks that supported tech stock valuations over the past decade have slowed sharply. A Goldman Sachs report shows that in the first quarter of 2026, among the four tech giants with the largest AI spending, only Microsoft was still buying back stock, with a mere $3.4 billion, the lowest level in nearly a decade. UBS calculates that hyperscale cloud service providers' capital expenditure in 2026 is expected to consume close to 100% of operating cash flow, compared to an average of just 40% over the past decade.
This AI-driven debt binge is pushing the global credit market toward an unknown tipping point. When bond vigilantes truly cut off liquidity supply, the chain-reaction storm from credit to equities may only just be beginning.
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