The furious push by

artificial intelligence
hyperscalers

to build out

data centres

will need about US$1.5 trillion of

investment-grade bonds

over the next five years and

extensive funding

from every other corner of the market, according to an analysis by

JPMorgan Chase & Co

.

“The question is not ‘which market will finance the AI-boom?’ Rather, the question is ‘how will financings be structured to access every capital market?’” according to strategists led by Tarek Hamid.

Leveraged finance is primed to provide around US$150 billion over the next half decade, they said. Even with funding from the investment-grade and high-yield bond markets, as well as up to US$40 billion per year in data-centre securitizations, it will still be insufficient to meet demand, the strategists added. Private credit and governments could help cover a remaining US$1.4 trillion funding gap, the report estimates.

The bank calculates an at least US$5 trillion tab that could climb as high as US$7 trillion, singlehandedly driving a reacceleration in growth in the bond and syndicated loan markets, the strategists wrote in a report Monday.

Data centre demand — which the analysts said will be limited only by physical constraints like computing resources, real estate, and energy — has gone parabolic in recent months, defying some market-watchers’ fears of a bubble. A US$30 billion bond sale by Meta Platforms Inc. last month set a record for the largest order book in the history of the high-grade bond market, and investors were ready to fork over another US$18 billion to Oracle Corp. last week to fund a data centre campus.

Despite the eye-popping sums the analysts estimated will be necessary to fund the next half-decade of expansion, they warned the path forward will not simply be “up and to the right.” Their biggest fear would be a repeat of the bubble that formed around telecom and fiber-optic networks in the late 1990s and early 2000s, when overcapacity led to a wave of defaults and a collapse in many sky-high valuations.

Warning signs that investor exuberance about data centres may be approaching irrational levels have been flashing brighter in recent weeks. More than half of data industry executives are worried about future industry distress in a recent poll, and others on Wall Street have expressed concern about the complex private debt instruments hyperscalers are using to keep AI funding off their balance sheets.

“Even if everything works, there will be spectacular winners, and probably some equally spectacular losers as well given the amount of capital involved and winner takes all nature of portions of the AI ecosystem,” the analysts said.

According to the bank’s strategists, the largest portion of the funding in the next five years is expected to come from the hyperscalers themselves, which are currently diverting US$500 billion of their US$700 billion in annual net operating income toward capital expenditures.

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Bloomberg.com