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Challenges In Sustaining Growth
The AI sector is marked by tremendous growth potential but also substantial financial burdens. This development is touted as a new industrial age driven by high-capacity computing, yet it is heavily reliant on debt rather than earnings.
Over $200 billion in AI-linked bonds have been issued this year, accounting for more than a quarter of the U.S. corporate supply. This includes companies like Meta, which issued $30 billion, and Oracle, with an $18 billion issuance. They utilise funds to expand data centres and bolster AI capacities. This cycle involves purchasing chips, building infrastructure, and funding growth, creating a closed-loop system of finance.
Despite this optimistic landscape, some concerns persist about sustaining this growth. Credit markets are under stress as large amounts of debt influence prices and inventories. There is no immediate credit risk, but markets are feeling pressure. The assets in data centres depreciate rapidly, and future rate increases could challenge financial stability.
The financial ecosystem is being stretched as the AI expansion relies more on debt, with its sustainability in question. The bond market is currently accommodating this growth, although the long-term consequences remain uncertain. The financial community must prepare for potential hurdles as AI continues its rapid expansion.
We see the boundless upside of the AI industrial age unfolding, but we also see the credit market showing signs of indigestion. While AI-linked stocks continue to rally, the sheer volume of debt needed to finance this build-out is starting to apply pressure. The nearly $275 billion in AI-related corporate bonds issued in 2025 alone has been absorbed, but not without consequence.
Opportunities And Precautions In The Market
The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is the canary in the coal mine for us. Despite equity markets reaching new highs in October 2025, the LQD saw net outflows for three consecutive weeks and its price has sagged over 2%, a noticeable divergence from rallying Treasuries. This isn’t about credit risk yet; it’s about the market plumbing groaning under the weight of historic supply.
This divergence between complacent equity volatility and rising bond market stress is where the opportunity lies for us. As of this week, the MOVE Index, which tracks Treasury market volatility, has crept up to its highest level in four months, while the VIX remains stubbornly low. This suggests a growing dislocation, where the bond market is pricing in risks that the stock market is currently ignoring.
In the coming weeks, we should consider buying downside protection where it remains cheap. This includes purchasing puts on the LQD for the first quarter of 2026, giving the trade time to mature as refinancing pressures build. We are also looking at buying protection on the CDX Investment Grade index, which, after tightening for most of the year, has widened by 5 basis points in the past ten days.
The circular flow of capital between vendors like Nvidia, cloud providers like Oracle, and hyperscalers like Meta makes the entire ecosystem vulnerable if the debt financing slows. A slowdown in the bond market’s appetite will directly impact capital expenditures, which could be the catalyst that ends the party for the tech giants. Therefore, protective puts on individual high-flying tech names heavily reliant on this capital cycle also look attractive.
We remember how, from the perspective of 2025, the early warnings of the 2008 credit crisis appeared in the market’s plumbing long before they hit the headlines. Right now, the music is still playing, and the street is buying the AI dream. But the bond market tape is telling us the room is getting full, and it’s time to find an exit before the hangover starts.
