Morgan Stanley Podcast: Rising Financing Costs for AI Data Centers and ABS Market Outlook

In a recent episode of the 'Thoughts on the Market' podcast, Carolyn Campbell, an Asset-Backed Securities (ABS) Strategist at Morgan Stanley, discusses a significant hurdle facing the AI boom: rising borrowing costs. As companies race to expand data center capacity, their financing costs are increasing, creating a tension that is reshaping the credit market.

Campbell notes that since early 2026, yields on 5-year US Treasuries have risen by more than 1 percentage point, while spreads on data center assets have widened even further. Yields on top-rated data center bonds have climbed from below 5% to nearly 7%. For companies seeking to finance multi-billion dollar facilities, this increase poses a substantial challenge.

Many operators rely on the securitized credit market, issuing bonds backed by the future revenue of their data centers. However, because these facilities often sign long-term leases well before securing financing, rental income is typically fixed. When interest rates spike, as seen this year, fixed revenues may not keep pace with rising borrowing costs. According to Morgan Stanley's analysis, when borrowing costs approach 8%, issuing such bonds becomes significantly more difficult under current conditions.

Despite short-term headwinds, Campbell views the slowdown in supply as temporary. She forecasts that US data center power capacity could grow from approximately 60 gigawatts today to 150 gigawatts by 2028, although actual capacity might fall 30-40% below this projection due to power supply constraints. Additionally, she highlights the colocation data center market as particularly attractive. These facilities host diverse tenants with shorter lease terms, allowing them to adapt more quickly to rising rents and market changes, offering distinct value in a high-interest-rate environment.