Companies could spend $50 billion a month on average to build data centers over the next few years, according to Moody’s Analytics. And to pay for all of that construction, Morgan Stanley expects companies to sell a record amount of investment-grade corporate bonds this year, driven mostly by firms trying to expand their AI capacity.
All of that new debt issuance could have some side effects on interest rates more broadly.
Corporate bonds are generally viewed as riskier than government bonds, so they tend to pay higher yields. But when it comes to big tech companies, investors don’t see that much more risk right now, said Lawrence Gillum, chief fixed income strategist at LPL Financial.
“You’re not getting a lot of compensation to own some of this debt, versus just owning Treasury securities,” Gillum said.
Gillum said the rates big tech companies pay could always go up. For instance, if a big wave of new corporate bonds floods the market, supply might outweigh demand.
“That means, in theory, that you could see higher yields, with this amount of issuance coming to market, to attract additional demand,” Gillum said.
In other words, companies would have to pay more interest to attract more investment. If that happens, investors who’d otherwise pour money into the safety of government bonds could be persuaded to throw some money at the corporate sector.
“You can think about, to some extent, corporates being substitutes for Treasuries, especially those that have a very high quality,” said Anna Cieslak, a finance professor at Duke University.
Cieslak said if investors start to favor corporate bonds over Treasuries, the interest rate the government pays to borrow could be affected, too.
“Then you could imagine that both yields on Treasuries and on corporates move up,” Cieslak said.
That, in turn, could make all kinds of consumer borrowing more expensive, including mortgages, credit cards, and auto loans. But Cieslak said that’s not guaranteed. For one, corporate bond yields might not rise if there’s enough demand for that debt.
“I don’t think these companies are just coming out there and saying, well, we just want to issue,” Cieslak said. “There is a possibility that they are catering to a certain demand.”
Plus, there are many other factors that could also influence bond yields this year, including stock market volatility, inflation expectations, and tariff uncertainty. Zachary Griffiths, head of U.S. investment grade and macro strategy at the research company CreditSights, said if growth slows this year, government bond yields could actually fall.
“A softening of the economy pushes the Fed to cut rates more, typically in a slower growth environment,” Griffiths said. “When you have growth concerns, you see longer term yields fall as well.”
But either way, the sheer amount of new debt expected to hit the market this year will affect rates. Lawrence Gillum at LPL Financial said the Treasury Department is also going to issue trillions of dollars worth of new debt.
“There’s a glut of supply coming to market,” Gillum said. “And demand needs to keep up with that supply, otherwise you’re going to have higher yields.”
Especially, he said, if companies keep selling trillions of dollars of bonds.