ROI-US hyperscalers' euro thirst — lifeblood or vampire?: Mike Dolan

Europe's lagging tech sector and restless governments face a double threat: ​U.S. digital giants are not only pulling further ahead in the AI race but may also crowd European ​borrowers out of their own bond market. "Crowding out" seems to be the phrase ‌of ​the moment in world bond markets once again — though not necessarily the traditional sense, where over-indebted governments crowd out their private sector by soaking up scarce investment with a torrent of sovereign bonds that pushes borrowing rates higher for everyone.

This time around, the dynamic also appears to be working the other way around: big U.S. hyperscalers, having burned through their cash piles ‌to ramp up data-center investment, are now turning to long-dated bond markets for the rest — and aggravating government borrowing costs in the process. But a new twist on the story came from European Central Bank researchers last weekend, as they examined concerns about the scale of U.S. hyperscaler borrowing in euros over the past year or so, and whether that pace and volume, if sustained, could start to crowd out European firms from their domestic bond market. It may also crimp the borrowing style of some euro governments.

An ECB ‌blog post starts with a measured view of the new euro bond offerings — so-called "reverse Yankee" bonds, in which U.S. firms tap foreign-currency debt markets. It noted the new debt has improved credit quality in the euro investment-grade corporate space while ‌enlivening the long end of the maturity spectrum. Remarkably, it's all happened without much disruption to pricing for other issuers. But that's just the first wave, it cautioned. If debt raising continues at this pace, there could be a high local price to pay as investor appetite is tested and markets begin to price in the deluge ahead.

MIGHTY CROWDED So far, these sales amount to about €40 billion ($46.34 billion), accounting for just over 1% of the main euro corporate bond indexes — double their share of the euro-denominated "reverse Yankee" market last year. Excluding financial companies, U.S. Big Tech now represents almost 10% of gross new issuance of euro-denominated ⁠bonds, led by ​Amazon and Alphabet.

However, hyperscalers accounted for 15% of the increase in domestic ⁠euro-denominated corporate bond holdings in the year to March, amid strong demand from pension funds and insurers. "Investors have finite balance sheets and portfolio limits. They may reduce holdings of other bonds to make room for large hyperscaler deals. That could create a crowding-out effect that raises costs even for issuers ⁠from unrelated industries," the ECB markets operations team wrote in the blog.

"For these investors looking for high-quality, long-maturity assets, hyperscaler debt may look like a possible alternative to some safe-haven style securities." What's more, higher weightings for these bonds in investment indexes may prompt passive investors to rebalance toward ​them.

"The sheer scale of hyperscalers’ future borrowing needs, coupled with expectations of sustained strong yet uncertain earnings, warrants close monitoring," the ECB team concluded. The latest anxiety in world bond markets has many ingredients, but this is certainly ⁠one of them.

BEATEN TO THE PUNCH What's certainly true is there's no sign the AI investment wave is cresting — with AI chip leader Nvidia's latest forecast of a 70% sales increase next year just the latest indication.

And many estimates put AI-related capital expenditure on data centers and other infrastructure at between $5 trillion and $7 trillion ⁠by ​2030, after topping $1 trillion in 2026 alone. With free cash virtually gone for the hyperscalers, borrowing is set to balloon. Up to $400 billion of new debt is now expected for 2026 as a whole. AI-related debt now accounts for some 7% of U.S. investment-grade corporate bond indexes. One concern about rising euro borrowing and reverse Yankees is that it could stymie or crowd out Europe's domestic funding for AI infrastructure.

As it stands, Morgan Stanley research last month on relative data-center development around the world ⁠showed Europe's buildout remains in its infancy. It estimated the region's data-center capacity grew 15% over the past year, compared with 26% in the U.S., and could accelerate at an annual rate of 20% through 2030. That would still be ⁠well below projected annual U.S. data-center growth of 30%, but on par ⁠with China. If Europe needs financing to accelerate that buildout, either privately or publicly, it must ensure its domestic investment pool isn't drained by its larger rivals across the Atlantic.

(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary.

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($1 = 0.8632 euros) (By Mike Dolan; Editing by Marguerita Choy)