BofA's Hartnett Recommends Tech Bonds Amid 9% 2026 Price Drop

Bank of America chief investment strategist Michael Hartnett recommends buying technology bonds in Hartnett's latest Flow Show note. Hartnett said U.S. technology bonds have fallen about 9% so far in 2026. Technology bonds' total return relative to the broad investment-grade bond index has reached a 30-year low.

Heavy issuance is the principal reason for the weakness in technology bonds. AI hyperscalers have issued $182 billion in bonds this year to finance data centers, compared with $17 billion in 2024. Investors have required higher yields to absorb the additional supply. Long-dated bonds from the Magnificent Seven and other AI leaders consequently yield between 6% and 8%, levels Hartnett considers attractive. CoreWeave Inc.'s high-yield bond maturing in 2031 yields 14.26%.

Hartnett interprets Meta's recent equity sale as a sign that Meta is giving credit investors greater consideration. Equity financing instead of additional borrowing improves the balance sheet supporting bondholders. Hyperscalers have raised $89 billion by issuing equity in 2026. Hyperscalers' share buybacks are proceeding at an annualized $14 billion, compared with $105 billion in 2024. Hartnett argues that large buybacks have ended and that retaining cash instead of distributing cash to shareholders benefits bondholders. Hartnett also believes AI bonds are approaching the end of a prolonged period of underperformance against AI stocks.

Bank of America projects AI capital expenditure increasing to $1.2 trillion in 2027 from $240 billion in 2024. Free cash flow is forecast to fall from $240 billion to negative $180 billion over the same period. Hartnett said the spending pressure means bond markets are now imposing discipline on the AI expansion.

S&P Global Market Intelligence data through Friday show sharply wider five-year credit default swap spreads across major technology companies since early September. Five-year credit default swaps measure the annual cost of protecting company debt against default. S&P Global Market Intelligence data put Oracle's spread at 276 basis points, compared with 210 basis points on September 1. The data put Nvidia's spread at 129 basis points, up from 84 basis points. Meta's spread increased from 94 basis points to 118 basis points. Alphabet's spread widened from 61 basis points to 85 basis points. Amazon's spread increased from 67 basis points to 90 basis points. Microsoft retained the lowest spread, rising from 47 basis points to 55 basis points. However, Oracle's spread has narrowed from the October 20 peak of 325 basis points, providing an early indication of stabilization.

S&P Global said in an October 13 update that AI-exposed technology companies' spreads had widened despite resilience in the broader investment-grade market. S&P Global said investors increasingly regard AI exposure as a separate credit risk. S&P Global said stronger correlations among hyperscalers, chipmakers and other AI issuers are making technology credit behave as one theme, reducing diversification benefits. S&P Global said hyperscaler-related bond issuance totaled about $240 billion in the first three quarters, consistent with the firm's full-year forecast of $250 billion to $300 billion.

Hartnett expects investors to remain risk-averse until the global interest-rate increase cycle finishes. Central banks have raised rates 42 times over the past six months. Hartnett anticipates relief in the first half of 2027 from geopolitical peace, sharply lower oil prices and an end to rate increases. Hartnett said a year-end rally requires the Roundhill Magnificent Seven ETF (MAGS) to hold $70 and the VanEck Semiconductor ETF (SMH) to hold $520. MAGS fell 2.2% on Friday to $69.70, slightly below Hartnett's threshold. SMH remains about 8% above Hartnett's threshold.

The 10-year Treasury yield stood at 4.93%. The 30-year Treasury yield stood at 5.29%. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) has fallen 5.5% this year.