Bond Investors Grow Wary of AI Debt as Democrats Prepare to Take Control of Congress

The caution is visible in credit spreads. ICE BofA index data show US high-yield spreads widened to 348 basis points during last Thursday's stock-market sell-off, their widest since May 2025, before narrowing to 342 basis points on Friday. Investment-grade spreads rose to 93 basis points from 91 the session before. Single-B spreads widened 35 basis points to 367, their highest since March.

The pressure matters because much of the money behind new US data centres has come from bond markets, and many data centre bonds are rated in the BB and single-B tiers, where investors are most sensitive to political and regulatory risk. If borrowing gets more expensive, the build-out that has done much to drive US growth could slow.

One deal shows how far prices can move. A wholly owned unit of Galaxy Digital sold B+ rated Galaxy Helios Data Center bonds in late July at a yield of 9.875%. By November 5 the bonds had fallen to 89.25 cents on the dollar, taking the yield to 13%.

Democrats plan to introduce legislation aimed at AI systems and data centre development when they take control of Congress in January. President Donald Trump has repeatedly dismissed calls for mandatory AI rules, but he signalled openness to safeguards over the weekend, after his party's losses in the midterm elections.

"The markets are definitely anxious right now," said Larry Holzenthaler, a senior portfolio manager at Catalyst Funds in New York. Ali Hassan, a portfolio manager at Thornburg Investment Management, said: "Appetite is more cautious and more discriminating." Hassan added that political and regulatory scrutiny was prompting investors to review credits up and down the supply chain.

The risk goes beyond the data centre operators themselves. Peter Yanulis, a multi-asset portfolio manager at Loomis Sayles, said a slowdown would hit suppliers, power producers and electrical contractors. Abiel Reinhart, a senior economist at J.P. Morgan, said: "Any slowdown in the pace of data center development has the potential to materially slow overall business investment."

Not everyone sees an immediate threat. Karen Choi, a portfolio manager at Capital Group, said capital spending and bond issuance were unlikely to change much in 2027 because many projects are already under way, and that political and regulatory uncertainty was more likely to affect 2028 to 2030.

Some investors think a slowdown could even help bondholders, because fewer new bonds would support the prices of existing ones. Yanulis said the market could see some relief from what he called the "open floodgates" of AI debt supply, and put the time needed to digest the transition at six to 12 months.

Ben Emons, chief investment officer at FedWatch Advisors, argued that federal action would move the build-out rather than stop it. "AI is not going to slow down," he said. "If it's going to slow down in Texas, it will pop up somewhere in another state and just continue."

The new Congress is sworn in in January. Democrats will need to show whether they can pass AI and data centre bills that a Republican president would sign, and bond investors will be watching the first proposals.