Artificial intelligence debt is poised to reach bubble levels, according to DoubleLine portfolio manager Robert Cohen. Speaking at the Bloomberg Global Credit Forum, Cohen highlighted the high probability of an AI bubble, urging money managers to focus on companies with robust balance sheets and investments with strong protections.
Cohen emphasized that while the AI debt market is not yet in a bubble, the demand remains strong, supported by major tech companies like Alphabet Inc. and Meta Platforms Inc. These hyperscalers provide backing that helps mitigate risk, according to Matt Brill of Invesco. More than $370 billion in AI-related debt has been issued since last year, with Bloomberg Intelligence projecting AI capital expenditure to hit $5 trillion over five years.
Anish Shah from Morgan Stanley noted that AI-related debt could account for 10% to 15% of all debt issuance this year, a significant increase from two years ago. Morgan Stanley expects US high-grade corporate bond sales to reach a record $2.25 trillion this year, driven by large bond sales from hyperscalers.
“What’s the probability that we will be in an AI bubble? I’ll put maybe 100% on that.”
Robert Cohen, DoubleLine Portfolio Manager
Cohen cautioned that equity valuations might be stretching, defining an equity bubble as prices reflecting unrealistic future growth expectations. Despite tight spreads, Cohen's firm is open to purchasing more AI-linked debt at the right price.
Maureen O’Connor from Wells Fargo mentioned that only a significant economic downturn or a rally in Treasury yields could disrupt the current tight range of debt spreads. Companies are increasingly looking to borrow now to capitalize on current market conditions.
“You want to focus on getting your money off the table as fast as possible.”
Matt Brill, Head of North America Investment Grade Credit at Invesco
Background
The potential AI debt bubble is reminiscent of past investment booms in sectors like railroads and the internet. As AI continues to attract significant investment, market participants should remain vigilant and assess the risks associated with this burgeoning sector.
As the AI sector continues to expand, investors and market participants should monitor developments closely, considering both the opportunities and risks associated with AI-related debt. The market's trajectory will depend on economic conditions and the ability of companies to manage their obligations effectively.
