By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 10 (Reuters) - Bond investors are growing more cautious on debt tied to the artificial intelligence boom, highlighting concerns over the expected efforts of a Democrat-controlled Congress to slow the pace of AI investment and data center expansion.
US high-yield credit spreads widened to 348 basis points in last Thursday's stock-market swoon, ICE BofA US Corporate Index data showed. That was the highest since May 2025, just a month after President Trump imposed
global tariffs. Spreads narrowed on Friday to 342 basis points.
"The markets are definitely anxious right now. I wouldn't be surprised to see some continued volatility in both high yield and loans," said Larry Holzenthaler, senior portfolio manager at Catalyst Funds in New York.
While healthy corporate fundamentals continue to support the market, a deeper reassessment of AI-related risk could push credit spreads wider in both high-yield and investment-grade debt in anticipation of stricter regulations on this technology, analysts and portfolio managers said. Investment-grade spreads were at 93 basis points last Thursday, against 91 the previous session.
Democrats are already planning to unleash a flood of new legislation targeting AI systems and data center development when they take control of Congress in January. Republican President Donald Trump has repeatedly dismissed calls to write mandatory rules for AI technology, but over the weekend, following a historic midterm loss for his party, he signaled openness to safeguards.
"Appetite is more cautious and more discriminating," said Ali Hassan, portfolio manager at Thornburg Investment Management. "Political and regulatory scrutiny is prompting a review of credits up and down the chain, from developers to contractors to suppliers."
MORE CAUTIOUS APPETITE
Data center bonds, many of them concentrated in the BB and single-B tiers of the junk bond market, have come under fresh pressure in recent weeks, especially during the technology selloff. Single-B spreads widened 35 basis points to 367 basis points, leading the deterioration in the high-yield market, analysts said, and hitting their highest levels since March.
Galaxy Helios Data Center bonds fell to 89.25 cents on the dollar on November 5, for instance, lifting yields to 13% from the 9.875% offered when Galaxy Digital's wholly owned unit sold the B+ rated debt in late July.
"A slowdown in the AI buildout that hits the supply chain, power producers, electrical contractors, equipment and machinery, data center developers, all of these are going to have a second-order effect," said Peter Yanulis, multi-asset portfolio manager at Loomis Sayles.
For investors, the larger concern is the potential impact of AI regulation on economic growth. Investment in artificial intelligence and the infrastructure underpinning it has been a major engine of US expansion, helping keep growth resilient this year despite broad uncertainties.
"Any slowdown in the pace of data center development has the potential to materially slow overall business investment," said Abiel Reinhart, senior economist at J.P. Morgan.
RELIEF FROM SUPPLY
In the near term, some investors believe a slowdown is probably a healthy thing for the credit market and for AI companies themselves, as stricter AI regulations mean less bond issuance -- which should help support prices.
"We can expect a bit more relief from the open floodgates that we've experienced on the AI supply and the market can now digest this transition period over the next six to 12 months," said Loomis Sayles' Yanulis.
While investors are reassessing longer-term growth expectations, they see little risk of an immediate pullback in borrowing or capital spending tied to projects already under construction.
"The political and regulatory uncertainty could impact the later years, 2028-2030 (and later), but it is unlikely to significantly change the capex and issuance numbers for 2027 as many of those projects are already underway and capital commitments have been made," said Karen Choi, portfolio manager at Capital Group.
While investors see little risk to near-term spending plans, many argue the bigger question is whether policy changes can meaningfully alter AI's long-term outlook.
"AI is not going to slow down," said Ben Emons, chief investment officer at FedWatch Advisors. "If it's going to slow down in Texas, it will pop up somewhere in another state and just continue."
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Colin Barr and Andrea Ricci )
