PRACTICE MANAGEMENT
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When Spreads Forget Risk: Lessons from the Tech Bubble for Today’s AI Debt Boom
By Charles R. Urquhart, CFA
It seems likely that 2025 will go down as the year credit spreads broke logic.
We’re seeing record issuance and war-size deficits in a slowing economy, yet both investment-grade and even BBB (and lower) bonds are being traded like blue chips. Investors are still buying the AI story, the soft landing story, and the “there’s no alternative” story.
As 2026 draws near, financial advisers need to take heed not because clients own Oracle bonds or AI ETFs but because this is what every cycle looks like before it all turns.
When Oracle sold $26 billion of new bonds in September, it was pitched as an ordinary deal to finance most of the company’s purchase of a cloud computing firm. On paper, it was just another mega deal. In fact, it was a reminder of just how bubbly credit markets become when a hot narrative takes hold. A borrower with a BBB+ rating was effectively treated like crown jewels, with $88 billion in orders at spreads hardly wider than Microsoft’s. That’s not price discovery. That’s a stampede.
Deals like this do not occur in a vacuum. They occur because investors have collectively talked themselves into believing that AI is the next great wave of corporate growth. Anything associated with it—sustainable or sensible be damned—is money well spent. It’s not the first time credit markets have suspended disbelief. If history is a precedent, it won’t end well. Spreads are supposed to be the reward for risk. When they compress into nothingness, they cease to function and instead blink complacency.
Back to the Tech Bubble
If this sounds familiar, it should. I was there when the dotcom bubble showed us how pernicious it can be to let balance sheets take a back seat to stories. At the time, spreads collapsed under the belief among investors that “new economy” companies did not have old economy risks. Debt had piled up, covenants were flouted, and credit ratings were brushed aside. It was all working—until it stopped. When it flipped, the same spreads that had looked tight and efficient turned into the trapdoor.
Telecoms were the easiest example. WorldCom, Global Crossing, and Qwest all had built empires on cheap debt and optimistic assumptions. Their bonds traded so tight due to the story, and it was a good one. But when the story broke, it was credit investors who took the pain. Defaults mounted, recoveries were paltry, and spreads blew out overnight. It was a brutal but simple lesson: credit cycles do not bend to hype.
It wasn’t just telecoms. Cisco was long the world's most valuable company by market cap. Lucent, too, benefited from the optimism, borrowing billions of dollars in bonds to fuel its expansion. Both were seen as linchpins of the new economy. (Amazon didn’t default, but the destruction of value for equity and credit investors was huge in both cases as expectations reset.) The loans had been issued at tight spreads, a uniform risk premium that didn’t leave room for any credit deterioration. It was a burden on companies far past the hype cycle.
Three Lessons Credit Markets Keep Forgetting
1. Markets usually can differentiate risk—until they can't.
And when the gap in yield between AAA bonds and BBB contracts to the thickness of a dime, it’s not because of some magic achievement at a BBB company. It’s because investors quit asking tough questions. That satisfaction came to a screeching halt in 2000. It will again. That Oracle could raise capital at spreads nearly indistinguishable from Microsoft is a measure of how far the markets have traveled down that road already.
2. There is leverage in “story stocks” both ways.
Debt feels inexpensive and endless when spreads are tight. “Growth” companies issue all the equity they can because capital is practically free. But leverage is like a spring. When the fundamentals change, it snaps back hard, and losses get magnified. Investors tell themselves additive debt to fuel transformative technology is special. It’s not. Although leverage is about multiplying bets in both directions.
3. Credit markets usually follow several weeks behind stocks—until they don’t.
The equity markets hog the limelight, but it’s credit that silently determines how long the party goes on. When spreads ultimately do adjust, they tend to do so quite brutally. We saw it with the telecoms in 2002. We saw it once again in structured credit in 2008. The AI buildout isn’t exempt. The longer risk is ignored, the more violent the eventual correction.
AI Isn’t a Free Pass
Maybe AI will be transformational. Perhaps it will “justify” investment booms and big ticket financings. But none of that changes the mechanics of credit cycles. Saying that doesn’t change the fact that BBB balance sheets are still awful, or that leverage is still plenty dangerous. Sure, Oracle got the red carpet treatment this time, but that was more about the desperate desire for yield than Oracle’s own safety. And it’s not just Oracle, either. Smaller AI-linked companies have been issuing outright garbage, with some marching up to the line between investment grade and high yield. And the market’s telling them, quite clearly, that they can borrow as much as they want. They’re willing to ignore their liabilities until it all blows up in their faces. Just ask the ghost of WorldCom.
The Psychology of Complacency
Credit investors pride themselves on being the grownups in the room. Stocks can chase dreams, while bonds are supposed to count the dollars and cents. And yet each cycle shows that credit investors are just as susceptible to narrative. Once a theme like AI gets hold of investors, the line between AAA and BBB starts to blur, as I have already described in great detail—and risk is precisely what you convince yourself it isn’t. That’s not prudence. That’s storytelling.
There’s a deeper irony here. More pointedly, the very investors who flock to bonds for stability and predictability are the ones most at risk when spread compression to unsustainable territory occurs. The narrower the spread, the less room for error. One miss on earnings, one downgrade, one change in policy, and the whole story can flip. We saw that during the tech crash with so-called “fallen angels”—companies downgraded from investment grade to junk but then being forced overnight to pay hundreds of basis points more when rolling over a debt.
Parallels to Today’s Market
There are clear echoes of the tech bubble. In each round, they had convinced themselves of a story: technology had changed the game, and the old risks no longer applied. In both, spreads flattened out, leverage soared, and investors talked themselves into believing that growth trumped all. The added wrinkle today is the colossal size of debt markets. Outstanding corporate debt has more than doubled since 2000, and institutional demand for yield is as high as it’s ever been. When spreads crack, the ripple effects will move quicker and further than two decades earlier.
Another parallel to observe: the growth of private credit. The way that telecom companies in the late 1990s looked to the bond market to help finance their expansion, today’s AI and tech-adjacent firms have found willing partners in private lenders. Those loans tend to offer less transparency and fewer covenants than public bonds. If spreads widen in the public market, private credit investors may wake up to find their protections are not bulletproof after all.
Practice Management Takeaway
Spreads are not mood rings; they’re risk gauges. When BBB bonds trade like AAA, it’s not because credit got safer; it’s because investors stopped asking questions. Advisers can use this lull of misplaced equanimity to reset client expectations. Narrow spreads are a chance to pare back exposure, upgrade in credit quality, and remind clients that income is not the same as safety. The discipline to rebalance ahead of spreads, not once they ultimately widen, is the hallmark of great advisors in late-cycle markets. AI might alter the tools we use, but it will not change the rules of credit or the benefits of being in proactive communication. The best practice isn’t predicting the turn; it’s preparing clients for it.
Charles Urquhart, CFA, is founder of Fixed Income Resources, a consultancy that helps financial advisors explain and position bonds with clients. He previously held senior roles at Fidelity and Tradeweb and writes frequently on credit markets.
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