The Middle East war crisis, reignited by the scrapping of the earlier memorandum of understanding (MOU), is holding back Big Tech companies that urgently need to invest in artificial intelligence (AI). Rising corporate bond yields are pushing up the cost of raising already astronomical investment funds.
According to the Financial Times (FT) and other outlets on the 23rd, the yield on the 10-year US Treasury note rose to 4.711% intraday in the New York bond market that day. The US 10-year yield rose for the fourth consecutive trading session, marking its highest level in 18 months since January 2025. It was the highest level since the launch of the Donald Trump administration's second term, surpassing the previous peak of 4.69% recorded during the war phase with Iran in May this year. A rise in bond yields means bond prices have fallen accordingly.
The direct factor driving Treasury selling is the deteriorating situation in the Middle East. Analysts say that as concerns grow over disruptions to crude oil supply, international oil prices have surged, and forecasts that energy-driven inflation could persist are pushing up Treasury yields. In particular, after Iran-backed Houthi rebels in Yemen said that day they had attacked a Saudi Arabian oil tanker off the Red Sea coast, and US President Trump also signaled the possibility of expanding attacks on Iran, the price of Brent crude broke through $100 per barrel.
The market is closely watching the possibility that the 10-year US Treasury yield could soon exceed 5%. A 10-year yield of 5% is considered an important psychological threshold in global financial markets. Analysts interpret that if the yield surpasses this level and remains high, corporate funding costs will rise and funds will flow into relatively safe bonds, which could place a considerable burden on the stock market. The US 10-year Treasury yield last recorded 5% in October 2023 (5.021% intraday).
The parties immediately hit by rising bond yields are the Big Tech companies that announced expanded AI infrastructure investments during the second-quarter earnings season. This is because the issuance yields on corporate bonds, their funding channel, are determined by adding each company's credit spread to Treasury yields. Big Tech firms, whose cash is now running low, have been struck by geopolitical headwinds as well. In fact, the yield on Alphabet's corporate bonds maturing in 2046 jumped to 6.11% intraday that day. Even though the company showed explosive growth the previous day, with second-quarter cloud revenue surging 82% from a year earlier, the bond selloff continued after it raised this year's investment to $205 billion, the largest among Big Tech firms. In addition, the yield on major cloud company Oracle's corporate bonds maturing in 2030 also rose 0.17 percentage points to 6.09%.
Meta Platforms (formerly Facebook), which has partnered with the world's largest asset manager BlackRock to build a 1GW data center in Texas, has also become unable to avoid rising borrowing costs. The FT reported, citing sources, that in the early stages of negotiations for the special purpose vehicle (SPV) pursuing the data center construction project to issue $12 billion (about 17.5 trillion won) in bonds, yields exceeding 7% are being discussed. This is 0.4 percentage points higher than the funding rate applied to the Hyperion data center project in Louisiana last October. One investor who mainly invests in investment-grade bonds noted, "When issuing corporate bonds worth tens of billions of dollars, even a 0.1 percentage point rise in yield means the issuing company must pay tens of millions of dollars in additional interest costs annually," adding, "In the high-grade bond market, that impact is very significant."
Fast-moving Wall Street has even rolled out risk-hedging products for investors who have invested in Big Tech corporate bonds. Goldman Sachs and JPMorgan Chase launched so-called "AI corporate bond basket" products this week. The products bundle bonds issued by 16 Big Tech firms, including Nvidia, grouped by yield so they can be bought and sold together. Bloomberg noted, "Concerns over risk are growing among investors who have invested in Big Tech corporate bonds."
