Artificial intelligence (AI) is increasingly influencing the U.S. corporate debt landscape, with AI-related borrowers accounting for nearly half of the year-to-date gross issuance of non-financial U.S. investment-grade debt with maturities beyond 15 years. This shift is prompting investors to explore credit diversification strategies, as highlighted by Lotfi Karoui, managing director at PIMCO.
He notes that AI hyperscaler debt issuance is projected to reach around $250 billion this year, while the broader AI ecosystem's debt issuance could range from $300 billion to $570 billion. Concerns about a potential slowdown in AI investments, particularly following the Democrats' midterm election victories, could complicate long-duration investment strategies, especially as U.S.
Treasurys have experienced volatility. Karoui emphasizes that while traditional sectors like financials and energy offer some diversification, they may be overpriced relative to their risk-adjusted returns.
Instead, he advocates for agency mortgage-backed securities, which have shown resilience to interest rate fluctuations, and higher-rated private mortgage bonds, which present attractive opportunities despite some risks. Additionally, emerging market debt is presented as a viable alternative, offering differentiated yield and risk profiles compared to U.S. corporate debt.
Karoui's insights suggest that investors should consider these diversifiers to navigate the evolving corporate debt market shaped by AI developments