Safer Than Treasuries? Microsoft’s AAA Bonds Offer Up to 6.04% Amid an AI Build-Out

• Cloud-led growth remained strong, with FY2026 revenue up 17.8% YoY to US$331.8 billion as Azure topped US$100 billion for the first time.
• AI spending is the key watchpoint, with capex up 79.6% YoY to US$115.9 billion and free cash flow easing 6.5% to US$67.0 billion.
• Leverage remains very low, with lease-adjusted total debt-to-EBITDA at 0.66x and interest coverage at 63.7x.
• Microsoft bonds are fairly priced, yielding 5.19% to 6.04%, in line with Apple and tighter than Alphabet and Amazon.

Company Profile

Microsoft hardly needs an introduction. Its Windows operating system and Microsoft 365 (formerly Office) suite sit on most of the world’s business desktops, while Azure is one of the three largest public cloud platforms globally, alongside Amazon Web Services and Google Cloud. Beyond these, the group owns LinkedIn, GitHub, Xbox gaming franchise, and the Bing search engine.

Microsoft reports its business across three segments, and each plays a distinct role. Productivity and Business Processes, built around Microsoft 365 and LinkedIn, is the company’s subscription-driven profit engine. Intelligent Cloud, anchored by Azure, is the growth engine and where most of the AI investment is going. The last segment, More Personal Computing, is made up of Windows, Xbox, and search advertising. It is the smallest and most consumer-facing segment, and the most exposed to swings in PC and gaming demand.

Recent Financials – Cloud Takes the Lead

For 4Q2026, which ended on 30 June 2026, Microsoft’s total revenue rose 17.7% YoY to US$90.0 billion. Growth was led by Intelligent Cloud, where revenue jumped 31.6% YoY to US$39.3 billion, as Azure and other cloud services revenue grew 43.0% on strong demand across the platform and continued growth in all workloads. As a result, Intelligent Cloud overtook Productivity and Business Processes as Microsoft’s largest segment this quarter, accounting for 43.7% of total revenue versus 42.1%.

Productivity and Business Processes also grew, with revenue up 14.3% YoY to US$37.8 billion. This was driven by Microsoft 365 commercial cloud, where revenue per user rose on the back of premium offerings, including Microsoft 365 Copilot, which surpassed 30 million paid seats. The smallest segment, More Personal Computing slipped 4.4% YoY to US$12.9 billion and contributed just 14.3% of total revenue. Windows OEM and devices revenue fell 7.0% YoY against a high prior-year base, partly offset by inventory builds, while Xbox content and services revenue fell 10.0% YoY.

Taking a broader view, total revenue for FY2026 rose 17.8% YoY to US$331.8 billion, up from US$281.7 billion a year earlier (see Figure 1). Growth was again led by Intelligent Cloud, which grew 29.7% YoY to US$137.8 billion as Azure surpassed US$100.0 billion in annual revenue for the first time, while Productivity and Business Processes rose 15.9% YoY to US$140.0 billion. Over the full year, the two segments contributed 41.5% and 42.2% of total revenue respectively. More Personal Computing was the only segment to decline, easing 1.1% YoY to US$54.1 billion.

Beyond segments, Microsoft also splits its revenue by type. Service and Other, largely cloud and subscription income, totalled US$267.1 billion in revenue in FY2026 (80.5% of total revenue), compared with US$64.7 billion (19.5% of total revenue) from Products such as software licences and devices. This means that the bulk of Microsoft’s revenue is recurring and comes from enterprise customers for whom switching away is costly, making its cash flow more predictable through the cycle and supporting its ability to service debt even in a downturn.

Looking ahead, management expects double-digit growth in revenue for FY2027. For 1Q2027, it guided revenue of US$89.85 billion to US$90.95 billion, up 16.0% to 17.0% YoY, with Intelligent Cloud expected to grow 33.0% to 34.0%, accelerating from 4Q2026. Management also noted that customer demand continues to exceed available capacity. In our view, this suggests that growth is currently limited more by how quickly Microsoft can bring new data centres online than by demand.

Figure 1: Microsoft Revenue by Segment (FY2025 vs FY2026)

Profitability – Margins Remain a Wide Cushion

Operating income rose 20.8% YoY to US$155.2 billion in FY2026, outpacing revenue growth and lifting operating margin to 46.8% from 45.6%, helped by a higher margin in Productivity and Business Processes. Intelligent Cloud’s margin slipped slightly to 41.3% from 42.0%, likely reflecting higher depreciation as new data centres came online. As more of Microsoft’s capex feeds through as depreciation, management expects FY2027 operating margin to decline by less than one percentage point, though operating income should still grow by double digits. Even so, a margin of close to 47% leaves Microsoft with a very large earnings cushion to service its debt.

Funding the AI Build-Out

Over the past year, the biggest change in Microsoft’s credit story has been its AI investment, as it builds out data centre capacity to meet demand for Azure and AI services, with purchases of property and equipment jumping 79.6% YoY to US$115.9 billion in FY2026, from US$64.6 billion. In 4Q2026, roughly two-thirds of capital expenditure (capex) went to short-lived assets, mainly CPUs and GPUs (AI chips) that power cloud and AI workloads, with the remainder going to long-lived assets such as data centre sites. Management also noted that higher component prices added to the quarter’s capex bill.

Net cash from operations grew 34.4% YoY to US$182.9 billion, which comfortably covered capex, but capex grew much faster, so free cash flow eased 6.5% YoY to US$67.0 billion. The spending is not slowing, as management expects FY2027 capex to grow further, with 1Q2027 alone guided at above US$50.0 billion, while still expecting free cash flow to remain positive for the year. Importantly, management described its spending on land and data centre builds as “quite flexible”, meaning the timing of the build out can be slowed if demand weakens.

For bondholders, shareholder payouts are also worth watching, as every dollar returned to shareholders is a dollar not available to repay debt. Microsoft paid out US$26.4 billion in dividends and spent US$22.3 billion on share buybacks in FY2026, a combined US$48.7 billion. These were fully funded from free cash flow, which covered the payouts 1.4x (down from 1.7x in FY2025), so Microsoft did not need to borrow additional funds to reward shareholders. Just as importantly, these payouts act as a buffer for creditors as buybacks are discretionary and can be scaled back if cash flow tightens, well before debt servicing is affected. However, with the capex still rising, this buffer is worth monitoring.

Balance Sheet – Debt Up, Leverage Still Low

As shown in Table 1, Microsoft’s total debt (including operating and finance lease liabilities) rose 14.8% YoY to US$128.8 billion at end-FY2026. The increase was driven entirely by finance lease liabilities, which rose 44.2% YoY to US$66.6 billion as Microsoft leased more data centre capacity. In fact, the company’s borrowings fell 6.6% YoY to US$40.3 billion, from US$43.2 billion a year earlier. With total assets growing 22.5% YoY to US$758.4 billion, total debt-to-total assets fell to 17.0% from 18.1%.

Against its total debt, Microsoft held US$76.8 billion in cash and short-term investments, the latter consisting largely of US government securities that can be converted into cash quickly. However, this was 18.7% lower than a year earlier, as both cash and cash equivalents (down 30.8% YoY) and short-term investments (down 13.1% YoY) were drawn down, likely to help fund capex. As a result, net debt rose to US$52.0 billion from US$17.6 billion. Still, as total shareholders’ equity rose 28.8% YoY to US$442.4 billion, net debt-to-total equity remained low at 11.7%, up from 5.1% a year earlier.

Table 1: Balance Sheet Strength

	FY2026	FY2025
Total Debt [1] (USD millions)	128,813	112,184
Total Assets [2] (USD millions)	758,376	619,003
Total Debt / Total Assets [1/2] * (%)	16.99%	18.12%
Cash and Short-Term Investments [3] (USD millions)	76,843	94,565
Net Debt [4, 1-3=4] (USD millions)	51,970	17,619
Total Equity [5] (USD millions)	442,387	343,479
Net Debt / Total Equity [4/5] (%)	11.75%	5.13%
Source: Company Financials Data as of 30 June 2026 *Debt figures are lease-adjusted (include operating and finance lease liabilities)

When measured against earnings, Microsoft’s debt load became lighter. EBITDA rose 24.1% YoY to US$194.2 billion, faster than the growth in debt, bringing the total debt-to-EBITDA down to 0.66x from 0.72x (see Table 2). Interest expense rose from US$2.4 billion to US$3.1 billion, but EBITDA still covers interest expense 63.7x. In other words, Microsoft could repay all its lease-adjusted debt with well under one year of EBITDA.

The main consideration sits off the balance sheet. As of 30 June 2026, Microsoft had signed around US$329.1 billion of data centre leases that have not yet commenced. These are long-dated, debt-like commitments, and Microsoft’s lease-adjusted debt will rise as each site is completed and added to the balance sheet.

Table 2: Leverage and Debt Servicing Capacity

	FY2026	FY2025
Total Debt [1] (USD millions)	128,813	112,184
EBITDA [2] (USD millions)	194,237	156,528
Total Debt / EBITDA [1/2] * (x)	0.66	0.72
Interest Expense [3] (USD millions)	3,051	2,385
Interest Coverage Ratio [2/3] (x)	63.66	65.63
Source: Company Financials Data as of 30 June 2026 *Debt figures are lease-adjusted (include operating and finance lease liabilities)

Overall, we view Microsoft’s credit profile as exceptionally strong. It is one of very few companies globally to hold a AAA rating from S&P, and its AAA / Aaa / – (S&P / Moody’s / Fitch) ratings sit above those of the US government (AA+ / Aa1 / AA+). While the AI build-out is reducing free cash flow headroom and will push lease liabilities higher, this is happening from a position of very low leverage, strong operating cash flow and high margin. We therefore expect Microsoft’s credit profile to remain stable.

Peer Comparison

The MSFT 4.200% 03Nov2035 Corp (USD) yielding 5.19%, offers a pickup of 22 bps over comparable US Treasuries, while the slightly longer MSFT 4.100% 06Feb2037 Corp (USD) yields 5.33%, a pickup of 32 bps (see Table 3). These are relatively thin spreads, but they are in line with what we would expect for a AAA-rated issuer that is rated above the US government itself.

Against Apple (AA+ / Aaa / –), which shares Microsoft’s Aaa rating from Moody’s but sits one notch lower at S&P, both Microsoft bonds offer a higher yield. The MSFT 2035 yields 5.19%, just 3 bps more than the AAPL 4.750% 12May2035 Corp (USD) at 5.16%, which we view as effectively in line given the Microsoft bond’s slightly later call and maturity dates. The MSFT 2037 offers a more meaningful pickup, yielding 5.33%, 17 bps more than the AAPL 4.500% 23Feb2036 Corp (USD) at 5.16%, despite Microsoft’s stronger credit rating.

Against Alphabet (AA+ / Aa2 / –) and Amazon (AA / A1 / AA-), Microsoft trades significantly tighter. Alphabet’s bonds offer yields of between 5.72% and 5.79%, while Amazon’s offer between 5.78% and 5.82%, providing a pickup of 46 to 53 bps and 49 to 59 bps respectively over comparable Microsoft bonds (see Figure 3). This gap is consistent with their lower credit ratings, particularly at Moody’s, where Alphabet and Amazon are rated two and four notches below Microsoft respectively.

Table 3: Peer Comparison (5 To 10 Years Tenor)

Issuer	Issue	Ask Price (USD)	Yield to Call (%)	Call / Maturity Date (Years to Call / Maturity)	Credit Ratings (S&P / Moody’s / Fitch)
Microsoft Corp	MSFT 4.200% 03Nov2035 Corp (USD)	92.97	5.19	03May2035 / 03Nov2035 (8.5 / 9.0)	AAA / Aaa / -
Microsoft Corp	MSFT 4.100% 06Feb2037 Corp (USD)	90.39	5.33	06Aug2036 / 06Feb2037 (9.8 / 10.3)	AAA / Aaa / -
Amazon.com Inc	AMZN 4.650% 20Nov2035 Corp (USD)	92.10	5.78	20Aug2035 / 20Nov2035 (8.8 / 9.1)	AA / A1 / AA-
Amazon.com Inc	AMZN 3.875% 22Aug2037 Corp (USD)	84.56	5.82	22Feb2037 / 22Aug2037 (10.3 / 10.8)	AA / A1 / AA-
Apple Inc	AAPL 4.750% 12May2035 Corp (USD)	97.17	5.16	12Feb2035 / 12May2035 (8.3 / 8.5)	AA+ / Aaa / -
Apple Inc	AAPL 4.500% 23Feb2036 Corp (USD)	95.19	5.16	23Aug2035 / 23Feb2036 (8.8 / 9.3)	AA+ / Aaa / -
Alphabet Inc	GOOGL 4.700% 15Nov2035 Corp (USD)	92.87	5.72	15Aug2035 / 15Nov2035 (8.8 / 9.1)	AA+ / Aa2 / -
Alphabet Inc	GOOGL 5.450% 15Aug2036 Corp (USD)	97.50	5.79	15May2036 / 15Aug2036 (9.6 / 9.8)	AA+ / Aa2 / -
Data as of 27 October 2026 Source: Bloomberg and Bondsupermart

Further out the curve, the MSFT 2.525% 01Jun2050 Corp (USD) and MSFT 2.921% 17Mar2052 Corp (USD) yield 6.04% and 6.02% respectively, a pickup of 70 bps and 69 bps over US Treasuries (see Table 4). This is effectively in line with both the AAPL 2.650% 11May2050 Corp (USD) and AAPL 3.950% 08Aug2052 Corp (USD) at 6.01%. Against Alphabet, Microsoft trades only slightly tighter, with the GOOGL 2.050% 15Aug2050 Corp (USD) yielding 6.13%, a pickup of 9 bps over the MSFT 2050. The gap widens against Amazon, whose AMZN 2.500% 03Jun2050 Corp (USD) and AMZN 3.950% 13Apr2052 Corp (USD) yield 6.41% and 6.49%, a pickup of 37 bps and 47 bps over the comparable Microsoft bonds, consistent with Amazon’s lower ratings.

Table 4: Peer Comparison (20+ Years Tenor)

Issuer	Issue	Ask Price (USD)	Yield to Call (%)	Call / Maturity Date (Years to Call / Maturity)	Credit Ratings (S&P / Moody’s / Fitch)
Microsoft Corp	MSFT 2.525% 01Jun2050 Corp (USD)	56.14	6.04	01Dec2049 / 01Jun2050 (23.1 / 23.6)	AAA / Aaa / -
Microsoft Corp	MSFT 2.921% 17Mar2052 Corp (USD)	59.98	6.02	17Sep2051 / 17Mar2052 (24.9 / 25.4)	AAA / Aaa / -
Amazon.com Inc	AMZN 2.500% 03Jun2050 Corp (USD)	52.79	6.41	03Dec2049 / 03Jun2050 (23.1 / 23.6)	AA / A1 / AA-
Amazon.com Inc	AMZN 3.950% 13Apr2052 Corp (USD)	68.40	6.49	13Oct2051 / 13Apr2052 (25.0 / 25.5)	AA / A1 / AA-
Apple Inc	AAPL 2.650% 11May2050 Corp (USD)	58.00	6.01	11Nov2049 / 11May2050 (23.0 / 23.5)	AA+ / Aaa / -
Apple Inc	AAPL 3.950% 08Aug2052 Corp (USD)	73.21	6.01	08Feb2052 / 08Aug2052 (25.3 / 25.8)	AA+ / Aaa / -
Alphabet Inc	GOOGL 2.050% 15Aug2050 Corp (USD)	49.25	6.13	15Feb2050 / 15Aug2050 (23.3 / 23.8)	AA+ / Aa2 / -
Data as of 27 October 2026 Source: Bloomberg and Bondsupermart

Overall, we view Microsoft’s bonds as fairly priced, offering yields in line with Apple and tighter than Amazon and Alphabet, consistent with its AAA credit rating.

For investors comfortable with duration risk, we prefer the MSFT 2.525% 01Jun2050 Corp (USD), yielding 6.04%, with approximately 23.1 years to call and 23.6 years to maturity. The issue is available on Bondsupermart Live and can be traded with a minimum order size of US$2,000 and increments of US$1,000. However, investors should note that at this tenor, the price can fluctuate significantly, and the bond is best suited for investors looking to trade instead of holding to maturity.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in  MSFT 2.525% 01Jun2050 Corp (USD), and GOOGL 2.050% 15Aug2050 Corp (USD). The analyst who produced this report holds NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.