AI capex surge drives higher US investment grade issuance forecast

UBS raised its 2026 US investment grade issuance forecast to $1.8 trillion from $1.725 trillion and increased its US investment grade technology supply estimate to $360 billion from $300 billion, citing a sharp rise in hyperscaler capital expenditure.

The bank left its US high yield, European investment grade and European high yield forecasts unchanged at $365 billion, $771 billion and $98 billion, respectively, but cut its US leveraged loan projection to $360 billion from $450 billion.

UBS said aggregate hyperscaler capital expenditure guidance for 2026 had risen by around $145b billion, implying an additional $40 billion to $50 billion of public debt issuance and lifting expected hyperscaler supply to $230 billion to $240 billion.

Amazon, Meta and Google had each raised 2026 capital expenditure guidance materially above consensus, driving total projected hyperscaler capex to around $770 billion, roughly 23% higher than UBS previously expected.

The analysts argued that stronger technology issuance, alongside a pick-up in mergers and acquisitions and refinancing activity, justified the higher US investment grade forecast, which implied year-on-year growth of 22%.

By contrast, UBS reduced its leveraged loan forecast on the view that artificial intelligence disruption risk was underpriced in loan and private credit markets.

It assumed a roughly 2% marginal rise in leveraged loan defaults and more than 100 basis points of spread widening to 610 basis points by the end of 2026, dampening refinancing and leveraged buyout activity.

UBS noted that year-to-date US investment-grade issuance had reached $296 billion, 31% higher than a year earlier, with technology issuance more than doubling as a share of total supply.

The bank expected more reverse yankee issuance, with US technology groups issuing in currencies such as sterling and Swiss francs to diversify funding, even though hedged yields indicated US dollar funding remained cheaper, particularly at longer maturities.

Reverse Yankee issuance refers to US companies selling bonds in non-US currencies to access different investor bases.

UBS argued that the investment-grade market could absorb the additional supply, supported by muted sovereign and emerging market issuance and relatively tight spreads in structured credit.

However, it maintained a short position on US investment-grade technology versus the broader index in its model portfolio, warning that spreads could widen from current levels despite the strong demand backdrop.