Microsoft joins AI bond rush as European governments face higher borrowing costs

Microsoft issued a $25 billion bond sale in US dollars last week, marking the entry of the final major US technology firm into the artificial intelligence financing market. This move completes the participation of the Big Five hyperscalers in a bond market that has become crowded with private capital seeking returns from the AI buildout.

The shift has intensified competition for fixed-income funds. According to filings reviewed by AI Industry Reviews, Amazon, Alphabet, Meta, and Oracle have collectively issued approximately $250 billion in US dollar bonds since the start of 2025. These four companies also sold an additional $41 billion in euro-denominated bonds. Analysts at Goldman Sachs project that total new bond sales from AI hyperscalers will reach $420 billion next year, with Dutch bank ING estimating that about 60 billion euros of that total will be issued in euros.

European sovereigns are feeling the pressure of this increased supply. In France, public debt stands at 119% of GDP, and the deficit remains above 5%. Consequently, yields on 10-year French bonds have risen from roughly 3.7% to nearly 5% over the past six months. The French government’s annual interest bill is expected to increase from 79 billion euros to 91 billion euros next year, surpassing 100 billion euros by 2028. Finance officials must now identify tens of billions of euros in cuts, tax increases, or additional borrowing to balance the books by the end of the decade.

Viktor Hjort, global head of credit strategy at BNP Paribas, described the current market condition as bond abundance. He noted that the presence of hyperscalers in the euro bond market is already creating competition within the corporate sector and between private companies and governments for available investment funds. Hjort pointed to last month’s jump in bond yields, which he attributed to rebounding energy prices from the Iran war and France’s political instability. These factors revealed the growing contest for capital as borrowing costs for both governments and companies rose simultaneously.

Historically, investors move into government bonds during uncertain periods, which typically lowers borrowing costs for states. The current dynamic reverses this trend. Economists at the European Central Bank warned in August that while the euro bond market is adapting to the presence of AI giants, the influx could make it harder for other sectors to access finance. They questioned whether financial markets can smoothly handle such large and concentrated debt inflows, noting a potential spillover to the sovereign and supranational segments. This suggests that international lenders, including the European Union and the European Investment Bank, may also face higher borrowing costs.

European corporations are also experiencing financial strain. Goldman Sachs reported that interest costs as a share of sales for companies in the Stoxx 600 index have risen by nearly half since 2022. This increase has cut earnings by more than 5% over the same period. Firms may need to reduce investments in new plants, equipment, and research, as well as shareholder payouts, to prioritize loan repayments in the face of rising interest rates and competition from AI bonds.

The impact extends to local governments. A study published in January for the OECD compared local bond markets in Belgium, Germany, Spain, Sweden, and Canada. The research found that where AI was spreading fastest, measured by the share of AI-related job vacancies, borrowing costs for cities and regions tended to rise. Christos Makridis, co-author of the study and a professor at Arizona State University, noted that while AI investments are linked to lower borrowing costs for US municipalities, the opposite holds true in several European countries.

The additional billions in new bonds planned for next year will likely add further pressure. While AI bonds are not the sole cause of Europe's widening fiscal strains, the massive capital appetite of US Big Tech firms is altering the landscape. European taxpayers may ultimately pay more on their own governments' debt, partly to finance an AI boom located across the Atlantic.