Who’s funding Silicon Valley’s data-centre dream? It might be you.

Would you bet your retirement on a data centre? It’s probably not a question many pension savers have asked, but it is now one that is very relevant. That’s because a large chunk of the $7tn investment pouring into data centres between now and 2030, as forecast by McKinsey, is being financed by debt of the kind that lines millions of nest eggs.

Dreams of artificial intelligence supremacy have spilled over from tech billionaires’ imaginations into the fixed-income markets, and investors are starting to get nervous. A basket of bonds from the biggest “hyperscalers” —the term used to describe companies such as Alphabet, Microsoft and Amazon — fell sharply this week as their perceived riskiness relative to Treasuries reached its highest level in months.

Oracle has been particularly hard hit. Compared with Microsoft, Alphabet or Facebook owner Meta Platforms, its balance sheet is already somewhat burdened: its credit rating of BBB, near the lowest within the investment-grade category, reflects a $110bn debt pile, triple its annual ebitda.

To some extent, buying bonds issued to fund AI isn’t really a bet on AI itself. Even if it disappoints, companies such as Microsoft and Amazon, which have in recent years issued debt not due until the 2050s or 2060s, are highly creditworthy. Until recently, investors demanded less yield from Microsoft’s bonds than they did from US government paper.

But the reality is that investors are taking long-term bets on a sector that has already turned on a dime more than once. Many long-dated bonds were issued at a time when tech giants were, compared with now, verging on boring. That’s no longer true. Meta’s revenue was shrinking in 2022; now it is growing at more than 20 per cent a year, but fuelled by a steep rise in fixed assets and borrowings.

And the debt that results is showing up in places where tech financing previously didn’t appear. Investment-grade debt markets are typically the deepest part of the credit ecosystem. In the past, nascent technologies have generally been funded by venture capital, public market equity or junk bonds, where investors accept the risk of meaningful losses.

Complexity adds some concern. Private equity groups with life insurers attached are structuring private credit with complex cash flow “waterfalls” to fund data centres. These often get investment-grade ratings and so can end up on conservative insurance balance sheets.

The bosses of big tech companies are rational in bringing in low-cost debt to fund their big plans. They are, in a sense, lucky that the era of exploding capital expenditure has coincided with a boom in demand for fixed-income assets among insurers and pension providers.

Pensioners and policyholders will be happy to see the coupons come rolling in. Meanwhile, market wobbles call into question how long this moment of “everybody wins” can really last.

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