Investors pull out of corporate bonds as AI borrowing and private credit stress raise concerns

Investors are pulling money out of bonds fast as huge AI-related borrowing and growing stress in private credit shake confidence across global markets, according to reporting from Reuters.

Lenders who usually back top-rated companies are now stepping aside because fresh debt sales from Big Tech and trouble inside private credit funds are raising the risk of higher funding costs and weaker earnings.

World stocks have already fallen 3% this month. Bitcoin and gold have slipped too. Even though investment-grade bonds still give borrowers some of the lowest costs seen in decades, managers say they are cutting exposure because the asset class feels overpriced.

Managers who oversee more than $10 trillion combined say pricing looks stretched and they no longer want heavy exposure to top-rated corporate debt. Some have reduced positions.

Others have sold out. A few are betting against investment-grade credit altogether. They started to step back after JPMorgan CEO Jamie Dimon warned last month about “cockroaches” hiding in credit markets.

Big Tech then rushed in with huge borrowing to build AI data centers, adding fresh pressure. At the same time, Blue Owl’s move to limit investor withdrawals created waves inside the $3 trillion private credit market. Managers said investment-grade debt was still not pricing enough risk.

Investors reduce exposure as spreads stay near multi-decade lows

Brian Kloss, a portfolio manager at Brandywine Global in Philadelphia, said “There’s fear in markets, and everyone’s looking for the next shoe to drop.”

Brian, whose firm is part of Franklin Templeton with $1.2 trillion in assets, said he has a cautious view on credit and is taking profits on existing positions.

An ICE-BofA index that tracks what highly rated U.S. companies pay over Treasuries now sits just 10 basis points above the 27-year low of 74 basis points reached in early October. Europe’s version of the same spread stands around 84 basis points, just slightly above 75 basis points in late October.

Salman Ahmed, Fidelity International’s global head of macro and strategic asset allocation, said pricing was “too rich” and that he held a short position because a downturn could create a “proper blowout.”

Salman said investment-grade credit has the most “bang for buck” for hedging if the economy weakens because there is a lot of room for prices to fall.

U.S. companies that sell premium high-yield and high-grade debt still pay a premium over government rates that reflects optimism about demand for borrowing, but that optimism now looks shaky.

John Stopford, head of multi-asset income at Ninety One, explained that “There’s a feedback loop.” John said he cut his credit exposure to zero because spreads guide how profits and share prices behave.

He said new bonds could get more expensive if private credit funds lose cash while AI borrowing keeps climbing.

“If the cost of borrowing goes up in private credit and there is lots of new issuance coming out, borrowers are going to have to pay up,” John said. “And if it’s more expensive for businesses to borrow, they are going to make less money.” Recent moves show how fast things are shifting.

After $75 billion in investment-grade debt from AI-driven Big Tech hit markets in September and October, the cost of five-year credit default swaps tied to Oracle jumped 44% in one month to 87 basis points.

Managers watch private credit stress and delayed U.S. data

Investors have also started pulling away from private debt funds while regulators examine lending standards. That scrutiny is adding doubt inside a market that has traded unusually calmly through recent selloffs.

David Furey, head of fixed income portfolio strategy at State Street, said they remain invested in corporate credit for now but keep a “close eye” on possible U.S. weakness. David said investment-grade pricing holds “very little cushion baked in” if the economy turns lower.

Jonathan Manning, a credit portfolio manager at Amundi, said he wants to “lighten up a little bit” because valuations look high and delayed U.S. data, including Thursday’s September jobs report, could increase volatility.

Russell Investments, which advises institutions managing more than $900 billion, said clients are also pulling back.

Van Luu, Russell’s global head of fixed income and FX solutions, said “It’s not so much that this is the asset class that they are most worried about. It’s the asset class that’s got very expensive so the upside isn’t really there anymore.”

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