The scale of bond issuance from large technology companies and the infrastructure built to support them has become one of the more striking developments in investment grade credit markets over the past two years. Rory Sandilands, Portfolio Manager at Aegon Asset Management, shares his insights.
Hyperscalers and the data centre operators that serve them have moved from a minor presence in corporate bond indices to a meaningful and growing share of supply, driven by the capital intensity of building out artificial intelligence infrastructure.
For investors, this raises a genuinely useful question. What does it mean when a handful of names from a single sector start to materially reshape the composition of the index you are measured against?
Indices are not static. They reflect whatever has been issued into the market, weighted by amount outstanding. When one sector issues at scale, relative to the rest of the market, its index weight rises mechanically, regardless of whether that sector’s fundamentals have changed. This is not a new phenomenon, corporate bond indices have been reshaped by waves of issuance from banks, autos, and energy companies at various points over the past two decades, but the pace and scale of the current technology and data centre wave is unusually pronounced.
For passive investors, or those managed closely against the benchmark, this matters because exposure to the sector simply grows as the index grows, whether or not the investment case has kept pace with the increase in supply. For active managers, the same shift poses a different kind of question. Does a larger weighting in a sector signal greater opportunity, greater risk, or simply more noise to navigate?
A useful way to think about this is through the basic mechanics of supply and demand. A rapid increase in issuance from any sector, all else being equal, tends to put some pressure on the relative valuation of that sector’s bonds, simply because more paper needs to find buyers.
This has been visible in parts of the technology and hyperscaler-related bond market, where the sheer weight of new issuance has, at times, led to a degree of underperformance relative to the broader index. That is a textbook illustration of a technical factor, supply, influencing valuations independently of credit fundamentals, which in many of these cases remain very strong given the scale and cash generation of the issuers involved.
This distinction between technical and fundamental drivers of value is one of the more important concepts for credit investors to hold onto, particularly in a market segment evolving as quickly as this one. A bond can cheapen in relative terms purely because of the volume of new supply, even where the underlying credit quality of the issuer has not deteriorated at all. Recognising that distinction is what allows investors to assess whether a sector has become more attractively priced, or whether it genuinely carries more risk.
It is also worth noting that not all exposure to this theme comes in the same form. Direct bonds issued by the hyperscalers themselves tend to carry very high credit ratings, reflecting the financial strength of those companies. But a related and increasingly significant pocket of issuance has emerged from the entities financing the physical infrastructure, the data centres themselves, often structured around long-term lease agreements with major technology tenants.
These structures sit a step removed from the hyperscalers’ own balance sheets, and the way they are priced can differ meaningfully from the parent companies that ultimately occupy the buildings. Understanding that difference, between corporate credit risk and infrastructure or asset-backed credit risk tied to a high-quality tenant, is an increasingly relevant part of credit analysis in this space.
Stepping back, the broader lesson here is less about any single sector and more about how index composition itself can become a source of both risk and opportunity. As any segment of the market grows quickly, whether through M&A-driven issuance, a structural shift in funding patterns, or a capital expenditure wave like the one supporting AI infrastructure, the index inevitably starts to look different to how it looked a few years earlier.
Investors who only assess risk relative to a backward-looking benchmark composition can find themselves unintentionally exposed to whatever sector has been issuing the most, rather than to the sectors and credits that best reflect their own view of value.
Investors trying to navigate this kind of shift, the discipline lies in separating three questions that are often conflated.
They are: How large has a sector’s presence in the index become, how has that size been driven by technical factors such as supply rather than by changes in fundamental credit quality, and where within that sector does genuine differentiation in credit risk and structure exist?
Treating an index weighting as a signal of either safety or risk, without examining what is driving it, risks missing both the dangers and the opportunities that a rapidly evolving market segment like this one can present.
