AI Boom Triggers Caution in Corporate Bond Market
Investors are growing increasingly wary of investment-grade (IG) corporate bonds as technology giants ramp up borrowing to fund artificial intelligence (AI) expansion. The surge in tech-related debt issuance and emerging concerns in the private credit sector are prompting asset managers to reevaluate their exposure to what has traditionally been considered a safe investment.
This shift in sentiment could signal rising funding costs, declining corporate earnings, and broader market volatility. Global equities have already taken a hit—falling 2.7% so far this month—as jittery investors react to macroeconomic uncertainty and delayed U.S. economic data that could influence monetary policy decisions.
Tech Companies Fuel Borrowing Spree
Major technology firms are aggressively raising capital to build AI infrastructure, particularly data centers. This borrowing surge comes amid broader concerns about hidden risks in the credit market, as highlighted by JPMorgan CEO Jamie Dimon’s recent warning about potential “cockroaches” in the financial system.
In September and October alone, AI-focused Big Tech companies issued approximately $75 billion in U.S. investment-grade debt. The borrowing frenzy has already had a tangible impact: the cost of five-year credit default swaps (CDS) for Oracle surged 44% in just one month, reaching 87 basis points, according to Refinitiv data.
Spreads Near Historic Lows Despite Risks
Despite these concerns, credit spreads remain narrow. The ICE-BofA index, which tracks the additional yield top-rated U.S. companies must pay over government bonds, is just 10 basis points above its 27-year low of 74 basis points recorded in early October. In Europe, spreads have ticked up slightly to 84 basis points from 75 in late October.
While narrow spreads suggest strong demand, many investors believe they no longer reflect the real risks. “There’s fear in markets, and everyone’s looking for the next shoe to drop,” said Brian Kloss, portfolio manager at Brandywine Global, a subsidiary of Franklin Templeton overseeing $1.7 trillion in assets. Kloss noted he is already “taking profits” on IG holdings due to rising caution.
Private Credit Under Pressure
Private credit markets are also showing signs of stress. Asset manager Blue Owl recently restricted fund withdrawals, causing ripples through the $3 trillion private credit sector. This move has added to investor unease about the stability of less-regulated lending markets.
John Stopford, head of multi-asset income at asset manager Ninety One, said his firm had reduced its credit exposure to zero in recent weeks. “If borrowing becomes more expensive in private credit and new issuance increases, businesses will face higher costs,” he explained. “And if it’s more expensive for businesses to borrow, they are going to make less money.”
Hedging Against Economic Downturn
Some investors are actively betting against IG bonds, believing that prices are too high given the looming risk of economic slowdown. Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, has taken a short position against IG credit. He argues that the market offers the most “bang for buck” in terms of hedging strategies that would benefit from a sustained downturn.
“IG credit pricing has very little cushion baked in for economic deterioration,” added David Furey, head of fixed income portfolio strategy at State Street Investment Management. While the firm remains invested in corporate credit for now, it is closely monitoring U.S. economic indicators for signs of weakness.
Delayed U.S. Data Adds to Uncertainty
Investors are also uneasy about delays in key U.S. data releases, such as jobs reports, which play a crucial role in shaping monetary policy expectations. Jonathan Manning, credit portfolio manager at Amundi, Europe’s largest asset manager, said he is looking to reduce IG credit exposure in anticipation of increased market volatility triggered by delayed data.
Clients of Russell Investments, which advises institutions managing over $900 billion, are also becoming more cautious. “It’s not so much that IG credit is the most worrisome asset class. It’s just become very expensive, and the upside potential isn’t really there anymore,” said Van Luu, the firm’s global head of fixed income and foreign exchange solutions.
Outlook: Proceed with Caution
As tech-driven borrowing continues and private credit markets face mounting scrutiny, the traditionally stable world of investment-grade corporate bonds is entering a period of uncertainty. Investors managing trillions in assets are signaling a shift in strategy, taking profits, reducing exposure, or even betting against the asset class altogether.
With credit spreads still near historical lows but warning signals flashing, market participants are preparing for potential turbulence ahead. Whether the AI boom will ultimately pay off or backfire remains to be seen, but for now, caution is the prevailing sentiment.
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