BofA's Hartnett Calls Tech Bonds "Undiscovered Diamonds" as AI Hyperscalers Ramp Up Debt Issuance

Bank of America chief investment strategist Michael Hartnett is urging investors to buy technology corporate bonds, calling them "undiscovered diamonds," as AI hyperscalers shift toward equity issuance and away from buybacks. Tech bonds have fallen about 9% year-to-date in 2026, pushing total returns relative to the broad investment-grade index to a 30-year low. The selloff stems from a surge in supply: AI hyperscalers have issued $182 billion in debt this year to fund data centers, up sharply from $17 billion in 2024. Long-dated bonds from the "Magnificent Seven" and other AI leaders now yield 6% to 8%, levels Hartnett deems attractive. Oracle's 2066 notes yield 8.43%, Meta's 7.40%, Amazon's 6.81%, Nvidia's 6.67%, Microsoft's 6.08% and Apple's 6.06%. CoreWeave's 2031 high-yield bonds yield 14.26%. Hartnett argues hyperscalers are now prioritizing bondholders, citing Meta's recent equity raise, and sees the underperformance of AI bonds versus AI stocks nearing an end. Hyperscalers have raised $89 billion in equity this year, while annualized buybacks have slowed to $14 billion from $1,050 billion in 2024. Bank of America estimates AI capital expenditure will climb to $1.2 trillion by 2027 from $240 billion in 2024, turning free cash flow negative $180 billion. Credit markets remain wary. Since early September, five-year CDS spreads have widened: Oracle to 276 basis points from 210, Nvidia to 129 from 84, Meta to 118 from 94, Alphabet to 85 from 61, Amazon to 90 from 67 and Microsoft to 55 from 47, per S&P Global Market Intelligence data through Friday. Oracle's spread has eased from an October 20 peak of 325 basis points. S&P Global said investors increasingly treat AI exposure as a standalone credit risk, reducing diversification benefits. Hartnett flagged two levels to watch before a year-end rally: $70 for the Roundhill Magnificent Seven ETF (MAGS), which closed Friday at $69.70 after falling 2.2%, and $520 for the VanEck Semiconductor ETF (SMH), which remains about 8% above that mark. The 10-year Treasury yield stands at 4.93% and the 30-year at 5.29%, while the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) is down 5.5% this year.