The creation of AI is giving tech investors new reasons to watch the bond market

Artificial intelligence is giving tech investors a whole new reason to pay attention to the Federal Reserve.

For years, megacap tech companies with large balance sheets have been able to fend off rising valuations, which often weigh heavily on smaller, less profitable peers.

But companies that were once cash cows are draining reserves and using debt for their ambitious data center designs. That makes the group more transparent on borrowing costs.

“Technology investors don’t tend to look at prices,” Peter Boockvar, chief investment officer of One Point BFG Wealth Partners, said in an interview. “Suddenly tech investors need to listen to what Kevin Warsh is saying, they need to start paying attention to what the inflation numbers are and how the US Treasury market is reacting to them.”

Warsh held his first press conference as Fed chairman on Wednesday. The central bank signaled a possible rate hike in 2026, triggering a sell-off in stocks and a rise in prices. The 10-year yield is trading near 4.45%.

High valuations have had a big impact on small tech companies, as investors value them based on future profits. When yields rise and the so-called “risk-free rate” rises, investors discount future cash flows, making them less expensive today.

The impact of the rate hike is now increasing upstream. That’s because tech hyperscalers are engaged in a high-speed race to build AI infrastructure, Amazon, Alphabets, Microsoft again Meta $750 billion is expected to be spent this year, up 80% from 2025.

Much of that expansion is financed by debt, which becomes a tougher sell when prices rise. nvidia, The OracleAmazon, Alphabet and Meta are turning to the debt market to the tune of tens of billions of dollars each.

OpenAI CFO Sarah Friar pointed to the ability to use credit markets as one motivation for going public. Reuters reported on Thursday, citing two sources familiar with the matter, its bankers SpaceXthat debuted on the Nasdaq last week, are preparing to meet with investors about a bond offering of at least $20 billion.

“It’s not recommended,” said Jeff Kilburg, CEO of KKM Financial, adding that there is an “unshakable need” for AI-related funding. “Technology leadership accepts credit. It’s a perfect way for these AI people to feel comfortable in what they want to borrow, and use.”

Tech veterans need money as some of them are losing their hard earned money. Goldman Sachs recently noted that capex as a percentage of revenue is at its highest level since the dot-com era. The company also expects capex this year to approach $920 billion, and says analyst estimates have been “very strong” in each of the past three years.

Amazon, which has forecast spending of nearly $200 billion this year, is expected to see negative free cash flow.

“Technology investors learn what it’s like to be an investor in old industrial businesses that need a lot of capital,” said Boockvar. “Free cash flow is volatile and access to both the debt and equity markets is critical to being able to cover it all.”

Getting out of debt can be a deliberate strategy. It can save money for financing while bringing flexibility when it comes to financing long-term properties.

Jay Woods, chief market strategist at Freedom Capital Markets, assesses credit risk on a company-by-company basis, not the industry as a whole. Nvidia, for example, is in strong financial shape, with free cash flow jumping past $48.5 billion in the latest quarter, up from $26.1 billion a year earlier.

“They still have a deep money bench, so I don’t think it’s that big of a red flag,” Woods said of Nvidia. “It gives them flexibility.”

— CNBC’S Drew Troast reporting contributed.