However, fixed income markets have also been positively influenced by the AI boom.\u00a0<\/p>\n
Over half of asset mangers utilising AI but barriers remain<\/a><\/p>\n Apart from the overall impact on investor sentiment and AI’s macroeconomic implications, there are numerous channels through which this new technology affects bond markets, including growing technology company issuance, disruption to corporate issuer business models and the potential for enhanced investment processes resulting from AI developments.\u00a0<\/p>\n Expanding issuance\u00a0<\/p>\n The concentration of technology company shares in equity indices is well documented. The same dominance does not exist in fixed income markets, however, with debt issued by technology companies having a limited share in bond indices.\u00a0<\/p>\n According to Bank of America\/ICE, the technology and electronics sector makes up just 4.8% of its Global Credit index. And despite the focus on capital spending in the technology sphere, this share has remained constant in recent years.\u00a0<\/p>\n In the US investment grade market, the share is around 7%, while it is lower in Europe and globally represents some 5% of in the high-yield space.\u00a0<\/p>\n But issuance is on the rise. There have been several large bond deals in the last year from hyperscalers engaged in huge capital spending to support AI’s infrastructure expansion.\u00a0<\/p>\n In the US, the face value of corporate bonds issued by technology\/electronics companies rose by 11% in the year to March to some $685bn. Based on corporate guidance, there should be a lot more coming as the capital expenditure largesse shows no sign of slowing.\u00a0<\/p>\n Investors urged to reconsider Meta over increasing non-financial risk<\/a><\/p>\n Most of this borrowing is occurring in the US but issuers have tapped the euro and sterling investment grade markets too.\u00a0<\/p>\n Google parent Alphabet rolled out its largest ever bond sale – a multi-tranche sterling issue – in February, including a 100-year maturity bond with a coupon of 6.125%. Elsewhere, Facebook owner Meta borrowed $30bn via the US market last year, while Oracle has also been a prolific borrower.<\/p>\n The tech giants’ share price performance underpins their quality. These are issuers with very strong earnings growth, robust balance sheets with limited debt and strong credit ratings. The sector’s growth should be welcomed by investors as it means greater diversification in bond indices which tend to be dominated by financials and more cyclical industrial companies.<\/p>\n While thematic investing is less common in bond markets, the growth in issuance from high-quality, well-rated technology companies could find some support from investors.\u00a0<\/p>\n Coupons are attractive and backed by strong earnings growth. For investors already exposed to technology through their equity holdings, bonds issued from the key AI drivers that provide potentially more predictable returns should appeal.<\/p>\n Fixed income disruption<\/p>\n Evidence highlighting how AI can disrupt business models by automating tasks, improving efficiency and speeding up processes is plentiful.\u00a0<\/p>\n The technology ecosystem is complex and smaller companies might find themselves more at risk of disruption. This has been a concern in the high yield, leverage loan and direct lending markets which have been a source of funding for smaller companies in this space.\u00a0<\/p>\n Again, bond markets are less concentrated than equity markets. The technology sector accounts for only around 5% of the US high yield market, with software around 3.5%. As concerns about the AI challenge to software services emerged at the start of the year, credit spreads in this sector widened.\u00a0<\/p>\n