The Long and Short
AI is becoming the bond market’s biggest duration trade
This material is a Marketing Communication and does not constitute Independent Investment Research.
The much-anticipated September FOMC meeting delivered a unanimous 25 bp hike. Credit spreads stayed mostly firm during the week, even as selling in US Treasuries tested 2007 levels and drew total-yield buyers into investment grade corporates. Fed-driven pressure on the yield curve has made 20-year corporate spreads look even richer. Limited year-to-date supply already had that maturity looking overbought. As a result, investors that need duration are being pushed into overweight positions in AI-related credit.
A little more than $100 billion of this year’s $1.64 trillion in investment grade issuance has come in the 20-year part of the curve. Hyperscalers, including SpaceEx, account for about 28% of that 20-year supply. Including AI data center-related deals, such as Sopaipilla Investor LLC and Hut 8 DC LLC, raises the share to 43.5%. That creates a problem for natural buyers of these maturities, especially investors with liability-matching mandates. Even staying index-neutral by sector is hard, leaving little room for tactical choices. The pressure also extends to seasoned 30-year bonds that have rolled down the curve and now trade in the 20-year secondary market (see Exhibit 1).
Exhibit 1. Investment Grade Fair Value Spread Curve signaling rich 20-year
Source: Bloomberg LP – Fair Value Curves
The heavy tech supply shows up clearly in Bloomberg fair value curves. A-rated and BBB-rated technology notes have a more traditional long-end slope than the rest of the investment grade market. Concentrated long-dated issuance from hyperscalers also helps explain the market’s broader steepness and the negative slope between 10-year and 20-year maturities seen elsewhere.
Exhibit 2. Investment Grade Technology Spread Curves – A-rated (blue) and BBB-rated (red) securities with distinctly steeper 20-year than the rest of the market
Source: Bloomberg LP – Fair Value Curves
The AI bias is likely to affect all long-duration issuance, not just 20-year bonds. This year, hyperscalers and AI data center-related borrowers account for about 11% of 10-year issuance, 22.5% of 30-year issuance and roughly half of issuance beyond 40 years. Hyperscaler capital spending is expected to rise nearly 50% in 2027 to more than $1.2 trillion as the AI buildout continues. That should bring more unsecured debt and more off-balance-sheet exposure to data center projects. Issuers have only begun to tap private placement deals with hyperscaler backing and investment grade ratings profiles.
The current richness of 20-year corporate bonds is a simplified signal and becomes more debatable once roll, dollar prices and other market factors are included. Differences between new-issue dollar prices and seasoned bonds can also shape relative-value decisions. Several forces could quickly erase the apparent richness. Supply could adjust if syndicate desks tell issuers they can sell 20-year maturities more cheaply than other tenors. That would include hyperscalers and related borrowers, already a large share of the market. Demand from liability matchers, especially global insurers, could also fade if they find better value in areas of private credit, a fast-growing market over the past year. A broader steepening in the yield curve driven by macroeconomic factors could also ease pricing pressure in corporates.
For now, corporate bond investors already managing heavy tech and communications duration exposure may be better served looking for value in long 10-year paper, including seasoned bonds with 10- to 15-year final maturities. That could let them benefit from negative spread curves away from AI. Liquidity in the secondary market remains a hurdle, but adding long duration away from AI is still harder than finding value farther down the yield curve.
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