The wave of artificial intelligence infrastructure spending is unleashing an unprecedented supply surge in credit markets, yet the current tranquility is merely a deceptive lull at the eye of the storm. Jeffrey Papai, Goldman Sachs' fixed income credit trader and investment grade credit specialist, cautions that after roughly $300 billion in AI-linked bond issuance this year, supply will taper off considerably in the fourth quarter, offering only a brief respite for AI credit spreads. This window, however, is remarkably short—he projects that by 2027, bond issuance from hyperscale cloud providers and chipmakers will climb about 40% above 2026 levels to reach roughly $340 billion, setting the stage for a far more severe market shock.

This warning arrives as the expansion of AI debt begins to exert competitive pressure on the U.S. Treasury market. According to Michael Cembalest of JPMorgan, debt issuance from the five largest hyperscale cloud firms plus Nvidia through 2026 totals approximately $320 billion, including special purpose vehicles for data center leases. When converted to a ten-year equivalent basis, the long-duration portion amounts to about $303 billion—equivalent to 68% of new long-duration borrowing by the U.S. Treasury over the same period.

Fourth Quarter: Tranquility at the Storm's Core

Papai notes that this year's ~$300 billion in AI supply has made it the most critical theme in the investment grade credit market. Heading into the fourth quarter, only a single hyperscale senior bond and a handful of data center deals are expected, marking the lowest issuance period since the AI buildout began—roughly 50% below any comparable prior stretch. Against this backdrop, he holds a short-term tactical bullish stance on the Goldman Sachs AI credit basket, seeing potential for spread tightening over the next one to two months. The basket sits within 10 basis points of its widest historical level, and reduced supply should lend support.

However, Papai stresses this view is purely tactical. He advises investors to trim positions on strength during any rally rather than chase momentum, since structurally, AI credit spreads remain in a long-term underweight position. Over the past year, AI spreads have widened by more than 50 basis points, and with a fresh wave of supply looming in 2027, renewed pressure is almost certain.

2027: A Larger Supply Wave Is on the Horizon

Papai offers a rough framework for estimating 2027 bond issuance from hyperscalers and chipmakers, explicitly noting it is not an official Goldman Sachs forecast but an extrapolation based on current trends. Core assumptions include: hyperscale capital expenditures of roughly $930 billion in 2027, based on the midpoint of Goldman Sachs Research and Bloomberg projections; the share of debt financing rising from about 30% in 2026 to 37.5%, reflecting an expected contraction in equity issuance; the U.S. dollar funding share falling from roughly 80% to 70%; and senior chip debt increasing from about $35 billion in 2026 to between $50 billion and $75 billion.

Under these assumptions, average quarterly issuance in 2027 would match the busiest quarter seen to date. Notably, maturities for hyperscalers and chipmakers in 2027-2028 total only about $45 billion—far below high-issuance sectors like banks, where ex-2029 TLAC callable bonds alone have maturities of roughly $180 billion. This implies minimal demand support from refinancing needs, leaving the market to absorb almost all new supply on its own.

Papai adds that incorporating data center and other AI-related issuance would expand the total further. Structured chip financing stands out as a potentially massive incremental area, possibly exceeding $100 billion, though its opaque structure and unpredictable timing make a precise estimate impossible at this stage.

Non-AI Investment Grade Bonds: Near-Term Relative Pressure

In contrast to the AI sector's brief reprieve, Papai views non-AI investment grade bonds as comparatively fragile in the near term. September is expected to bring roughly $230 billion in predominantly non-AI investment grade supply, weighing on the sector. Nonetheless, he points out that yield-driven demand for investment grade debt overall remains robust, and expected supply duration looks short. He therefore recommends treating any supply-induced dip in non-AI investment grade bonds over the coming weeks as a buying opportunity.

From a broader perspective, investment grade credit spreads have widened throughout the summer yet remain within their range—the index spread sits at about 80 basis points, above the 77 basis point year-to-date average, while the GS100 spread is near 99 basis points versus a 96 basis point average.

Structural Shift in Credit Markets: Risk Transfer Expands Sharply

Papai also highlights that the scale of risk transfer within credit markets is growing rapidly across multiple product lines, a trend set to accelerate into 2027. The credit default swap market is experiencing a marked resurgence. He notes several relationship managers who last traded CDS before the global financial crisis have recently returned with inquiries, signaling a clear uptick in demand for hedging tools. After nearly 15 years of decline, CDS volumes are projected to grow about 15% annually in both 2025 and 2026.

Meanwhile, basket total return swaps continue to expand quickly, and cash bond trading volumes have reached record highs, with investment grade and high yield activity both up 10% to 15% year over year. Papai believes these trends will intensify as structured chip and data center financing grows—funding characterized by shorter duration and higher hedging needs—potentially making CDS traders one of the most sought-after roles on Wall Street by 2027.