Hartnett’s call puts tech credit in contrast with tech equities. Bond investors are being paid more to fund the AI build-out, while shareholders are losing the buyback support that underpinned megacap returns for years. Wider default swap spreads across the biggest names show credit markets are still pricing AI as a distinct risk, although Oracle’s retreat from its October peak hints at some stabilisation. For equities, the Roundhill Magnificent Seven ETF closing Friday just below Hartnett’s $70 threshold is an early warning on his year-end rally framework. With long-dated Treasury yields still elevated and central banks tightening, the rate backdrop remains the main obstacle to a broader recovery in risk appetite.
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After a year of being flooded with AI debt, tech bonds now look like the better-protected way into the boom, Hartnett argues, because the hyperscalers have started treating creditors better than shareholders.
Summary:
- Bank of America’s Michael Hartnett recommends buying US tech bonds, which have fallen about 9% in 2026, leaving their returns relative to investment grade at a 30-year low
- Heavy supply is the main driver, with AI hyperscalers issuing $182 billion of bonds this year against $17 billion in 2024, pushing long-dated megacap yields to between 6% and 8%
- Hartnett says hyperscalers’ $89 billion of equity issuance and a collapse in buybacks to an annualised $14 billion favour bondholders
- S&P Global Market Intelligence data show five-year credit default swap spreads have widened sharply across Big Tech since September, though Oracle’s has eased from its October peak
- Hartnett expects relief in the first half of 2027 and says a year-end rally needs the Magnificent Seven ETF to hold $70, a level it slipped just below on Friday
Bank of America chief investment strategist Michael Hartnett is recommending investors buy technology bonds, arguing that a borrowing binge by AI hyperscalers has pushed tech debt to levels that offer value after a punishing year.
In his latest “Flow Show” note, Hartnett said US technology bonds have fallen about 9% in 2026, leaving their total return relative to the broader investment-grade index at a 30-year low. The main cause has been supply. Hyperscalers have issued $182 billion of bonds this year to fund data centres, up from $17 billion in 2024, and investors have demanded higher yields to absorb it. Long-dated bonds from the Magnificent Seven and other AI leaders now yield between 6% and 8%, levels Hartnett considers attractive, while CoreWeave’s 2031 high-yield bond yields more than 14%.
Hartnett argues the balance of power is shifting toward creditors. He pointed to Meta’s recent share sale as a sign the company is giving bondholders more consideration, since raising equity rather than adding debt strengthens the balance sheet behind its bonds. Hyperscalers have raised $89 billion through equity issuance this year, while buybacks have dropped to an annualised $14 billion from $105 billion in 2024. Hartnett said the era of large buybacks is over and that retaining cash benefits bondholders. He also expects AI bonds’ long run of underperformance against AI stocks to end.
The spending pressure is considerable. Bank of America projects AI capital expenditure rising to $1.2 trillion in 2027 from $240 billion in 2024, while free cash flow swings from $240 billion to a negative $180 billion over the same period. Hartnett said bond markets are now imposing discipline on the AI expansion.
Credit markets have been signalling stress. S&P Global Market Intelligence data as of Friday showed five-year credit default swap spreads widening sharply across major tech companies since early September, with Oracle’s rising to 276 basis points from 210 and Nvidia’s to 129 from 84. Oracle’s spread has, however, eased from an October 20 peak of 325, an early sign of stabilisation. S&P Global said in October that investors increasingly treat AI exposure as a separate credit risk.
Hartnett expects investors to stay risk-averse until the global rate-hiking cycle ends, noting central banks have raised rates 42 times in the past six months. He sees relief in the first half of 2027 from geopolitical peace, sharply lower oil prices and an end to hikes. In the meantime, he said a year-end rally depends on the Roundhill Magnificent Seven ETF holding $70 and the VanEck Semiconductor ETF holding $520. The Magnificent Seven fund closed just below its threshold on Friday, while the semiconductor fund remains about 8% above its level.
This article was written by Eamonn Sheridan at investinglive.com.
