{"id":293441,"date":"2026-03-19T09:36:07","date_gmt":"2026-03-19T09:36:07","guid":{"rendered":"https:\/\/www.quoniam.com\/?p=293441"},"modified":"2026-03-19T09:36:10","modified_gmt":"2026-03-19T09:36:10","slug":"credit-spreads-dispersion-technology-bubbles-dotcom-ai","status":"publish","type":"post","link":"https:\/\/www.quoniam.com\/en\/article\/credit-spreads-dispersion-technology-bubbles-dotcom-ai\/","title":{"rendered":"Credit spreads, dispersion and the detection of technology bubbles \u2013 Dotcom era vs. AI cycle"},"content":{"rendered":"\n
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1. Introduction<\/h5>\n\n\n\n

Technology-driven equity booms repeatedly raise the same question: do financial markets signal emerging fragility before prices correct, or do they collectively participate in exuberant valuation expansion? The collapse of the IT and telecom bubble in 2000\u20132002 remains one of the most dramatic episodes of valuation reversal in modern capital markets. The recent artificial intelligence (AI) cycle has once again triggered debate about whether markets are witnessing a structural productivity transformation or the formation of another technology bubble.<\/p>\n\n\n\n

Credit markets are frequently viewed as more disciplined than equity markets. Equity holders benefit from unlimited upside, whereas bondholders are primarily exposed to downside risk. In structural capital structure models, credit spreads respond directly to asset volatility, leverage and distance to default. If fragility accumulates beneath rising valuations, credit spreads should widen before equity markets decline.<\/p>\n\n\n\n

However, this intuition requires refinement. If equity markets rise because discount rates fall or valuation multiples expand without simultaneous deterioration in balance-sheet resilience, credit spreads may remain stable. Credit spreads measure default risk, not valuation excess. The distinction between fragility and valuation is therefore central.<\/p>\n\n\n\n

This study investigates whether IT-sector credit spreads \u2014 and, crucially, their cross-sectional dispersion \u2014 contain early warning signals during two technology cycles:<\/p>\n\n\n\n

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  1. The Dotcom period (1997\u20132001)<\/li>\n\n\n\n
  2. The AI period (2025\u20132026)<\/li>\n<\/ol>\n\n\n\n

    Investment Grade (IG) and High Yield (HY) bonds are analysed separately in the empirical part.<\/p>\n<\/div><\/div>\n\n\n\n

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    2. Technology cycles: 2000 versus 2026<\/h5>\n\n\n\n
    2.1 The Dotcom episode<\/h5>\n\n\n\n

    The late 1990s were characterised by extraordinary equity valuation expansion in internet and telecom firms. Telecom operators financed infrastructure expansion with substantial debt issuance, including large volumes of high-yield bonds. The NASDAQ peaked in early 2000 before collapsing sharply.<\/p>\n\n\n\n

    Credit spreads widened dramatically only once refinancing conditions tightened and defaults materialised. During the euphoric build-up phase, spreads remained comparatively contained. This raises the question whether credit markets provide early warning signals during valuation booms or whether they respond primarily once fragility becomes tangible.<\/p>\n<\/div><\/div>\n\n\n\n

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    2.2 The AI cycle<\/h5>\n\n\n\n

    The current AI-driven rally differs structurally. The leading firms are highly profitable and maintain strong balance sheets. Leverage remains moderate relative to the telecom expansion of the late 1990s. While capital expenditure is elevated, internal financing capacity is substantial. In this environment, it is not obvious that spreads should widen unless fragility genuinely increases.<\/p>\n<\/div><\/div>\n\n\n\n

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    3. Theoretical framework<\/h5>\n\n\n\n
    3.1 Structural credit risk and the Merton model<\/h5>\n\n\n\n

    In the Merton (1974) framework, equity can be interpreted as a call option on firm assets, while debt equals a risk-free bond minus a put option on firm assets:<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    where ET<\/sub><\/em>\u200b and BT<\/sub><\/em>\u200b denote the values of equity and debt, respectively, at maturity T<\/em>, VT<\/sub><\/em>\u200b is the value of the firm\u2019s assets at time T<\/em>, and D<\/em> is the nominal value of debt due at maturity.<\/p>\n\n\n\n

    Figure 1 displays the payout profile of the bond and the equity of the company as a function of the value of the company\u2019s assets.<\/p>\n<\/div><\/div>\n\n\n\n

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    Figure 1: Payout profile of asset classes in the Merton model<\/h5>\n\n\n\n
    \"\"
    Source: Quoniam Asset Management GmbH<\/figcaption><\/figure>\n<\/div><\/div>\n\n\n\n
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    The payout of the bond is capped to the upside at the face value of the debt (assuming a zero coupon bond here for the sake of simplicity) but drops to zero with declining company value. The equity, on the other hand is a subordinated claim to the bond with limited upside but capped to zero to the downside. That explains why credit spreads and equity of the same company show different dynamics:<\/p>\n\n\n\n

    In particular, credit spreads of the company increase with:<\/p>\n\n\n\n