"Buy Rough Diamonds": Big Tech Bonds Have Become More Attractive Than Stocks — BofA

The best opportunity for returns right now lies in the bonds of tech giants, rather than their stocks, according to Michael Hartnett, chief investment strategist at Bank of America (BofA). His views were reported by CNBC. Concerns about the massive amounts of debt being raised to fund artificial intelligence development have pushed bond yields higher: even investment-grade bonds from the largest cloud providers are yielding up to 8%, the network reports.

According to Hartnett, hyperscalers have issued approximately $271 billion in bonds and stocks since the beginning of the year. “Buy the ‘rough diamonds’ among tech bonds. Yields on debt securities from the ‘Magnificent Seven’ are attractive at 6–8%,” he noted. In the analyst’s view, Meta’s decision to raise funds by issuing shares rather than bonds signals the end of the “era of large-scale share buybacks” (previously, tech giants propped up their stock prices by buying back their own shares; however, now that Meta needed funding for AI, the company decided, on the contrary, to issue new shares, diluting the stakes of current shareholders). In addition, the strategist is confident that “the period during which AI bonds lagged behind stocks” has also come to an end. Even Microsoft is entering the bond market to finance AI projects, having announced a new $25 billion offering, notes CNBC.

Meanwhile, the cost of credit default swaps on the debt of several major U.S. technology companies hit new all-time highs on October 30. Records were set for Intel, Broadcom, Amazon, Microsoft, Alphabet, and SpaceX, while AMD’s rate rose to its highest level since early 2019.

This week, shares of several tech companies fell following the release of their earnings reports: many of them reported unexpectedly large negative free cash flow amid massive capital expenditures on AI, according to CNBC. For example, Amazon’s stock fell nearly 4%—in its earnings report released the day before, the company reported a negative free cash flow of $42.4 billion for the 12 months ending in September (a year ago, Amazon’s free cash flow was positive). Google’s parent company, Alphabet, meanwhile, reported a negative free cash flow of $9.1 billion. For the past quarter, the company reported capital expenditures that more than doubled year-over-year. The day before, the company’s stock experienced its worst day in history.

This article was AI-translated and verified by a human editor