Bank of America: Rate hikes collide with AI financing wave, creating an opportunity to allocate to tech debt

Why are bond markets starting to weigh on the AI rally?

Over the past six months, central banks worldwide have raised rates a combined 42 times. Over the past four months, the dollar and US Treasury yields have risen, the leadership of tech stocks has stalled or reversed, and the semiconductor index has fallen 20%. BofA sees this as the pain of tightening, but not yet fatal unless unemployment surges or a credit event occurs.
BofA expects capital spending by AI hyperscalers to rise from 240 billion dollars in 2024 to 1.2 trillion dollars in 2027, while free cash flow falls from 240 billion dollars to negative 180 billion dollars over the same period. Higher spending and negative cash flow make financing costs a significant constraint on AI expansion and stock valuations.
BofA believes risk assets and the AI rally need lower bond yields and easier financial conditions. Its envisaged path to relief in the first half of 2027 includes an easing of geopolitical conflicts, a sharp fall in oil prices and an end to rate hikes.

According to BofA, AI hyperscalers issued 182 billion dollars in bonds in 2026, substantially more than the 17 billion dollars issued in 2024. They also issued 89 billion dollars in equity in 2026. As financing needs rose, buybacks annualised at the year-to-date pace were about 14 billion dollars, below the 105 billion dollars recorded in 2024.
US tech debt has returned negative 9% since the start of 2026, with total returns relative to the investment-grade bond index at a 30-year low. BofA therefore sees value in allocating to tech debt and notes that yields on the Magnificent Seven’s bonds are about 6%–8%.

In the week ending 28 October, global equity funds saw net inflows of 56.2 billion dollars and bond funds net inflows of 15.4 billion dollars. Within equity flows, ETFs received 75.9 billion dollars, while actively managed mutual funds saw outflows of 19.6 billion dollars.
Regional flows diverged: Chinese equity funds attracted 25.7 billion dollars, the most since April 2025, which BofA linked to buying by the “national team”; Japan attracted 6.8 billion dollars, the most since May 2013; and Europe saw outflows of 2.3 billion dollars, the most since July 2026.
Despite strong equity inflows, BofA’s Bull & Bear Indicator fell from 7.2 to 7.1, signalling neutral sentiment: weaker global equity market breadth and wider high-yield and bank subordinated debt spreads offset the support from inflows.

BofA expects oil prices could fall sharply in the first half of 2027 if geopolitical tensions ease and supply increases. This is also one of its conditions for waiting until the rate-hiking cycle ends and increasing risk-asset allocations again.
The bank is also watching the US midterm elections: markets are pricing in risk aversion from a Democratic sweep, but have yet to price in a scenario in which Democrats win 53 Senate seats and bond yields jump. BofA believes voter concern about the cost of living could be unfavourable in 2027 for technology, banking and energy monopolies and favourable for consumer discretionary stocks.