AI Debt Warning Signs Are Piling Up: Why Bond Markets Are Getting Nervous About AI Infrastructure Spending

The artificial intelligence (AI) boom has a bit of a problem: someone has to pay for it. Despite soaring sales, the costs are still far ahead of the revenues, and more and more companies are turning to the debt market to fund the gap and continue the AI build-out.

But as companies borrow more to build their data centers and fill them with advanced chips, investors are getting nervous about when they'll see a return -- or if they will. This week, that fear has shown up in the bond market where yields are spiking, and the cost to insure the debt against default has reached record levels for companies like CoreWeave and Oracle.

CoreWeave's lenders are getting nervous

The turbulence was rough enough for Nvidia CEO Jensen Huang to step in to try to reassure investors, telling investors that CoreWeave's "financial strength is improving every day." Despite his insistence, the company's bond prices have plummeted; some were trading around 80% of face value, firmly in "distressed" territory. Rates are spiking too, with its October 2031 bond yield reaching 16%.

Jensen Huang. Image source: Getty Images.

Perhaps the clearest sign of bond investor unease was the jump in the five- year credit default swaps (CDS) spread -- basically the cost to insure CoreWeave debt against default -- which reached a record high of about 1,195 basis points. In simple terms, that means it would cost an investor $119,500 a year to insure $1 million in CoreWeave debt.

Oracle's borrowing comes under scrutiny

While CoreWeave took the brunt of it, Oracle (NYSE:ORCL) was not spared either. On Thursday, its five-year CDS spread was nearing 300 basis points, a record for the company.

Oracle's notes due in November 2032 were yielding 7.24% on Wednesday. This is coming just on the heels of a recent credit rating downgrade from S&P Global, which now rates Oracle just one notch above speculative or "junk" grade.

The unease extends across the AI trade

Bonds tied to Meta's Hyperion data-center project have fallen, trading around 91 cents on the dollar and yields reaching as high as 7.55% as of late September. CDS spreads have reached above 100 basis points.

SoftBank, a major backer of OpenAI and other AI ventures, saw its five-year CDS spread climb 24 basis points to 424 on Thursday. SpaceX saw its debt-insurance costs rise sharply during the week too.

Higher rates make the math harder

There are a few things going on here. First, the macro picture is getting harder to ignore. Oil prices continue to climb, adding to already substantial inflation fears. The most recent wholesale price data indicates things are moving in the wrong direction.

This has led to a spike in U.S. Treasury rates, and with the 10-year yielding roughly 5%, companies are forced to offer a considerably higher return to convince investors to take on the added risk.

That's the macro pressure, but the economics of AI itself matter just as much. This is an incredibly capital-intensive business. Companies have to spend enormous sums building and equipping data centers before those facilities bring in any revenue.

And eventually, that revenue has to cover operating costs, interest payments, and the initial investment. It's still not clear that all these projects will generate enough to justify their cost. The longer that uncertainty persists, the more investors are likely to demand in return for lending these companies money.

Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Nvidia, and Oracle. The Motley Fool has a disclosure policy.