Strategists at HSBC have cautioned that credit investors should guard against potential downside risks associated with "AI euphoria," following a surge in optimism around artificial intelligence that has driven yield premiums to their lowest levels in decades. In a report, HSBC strategists Song Jin Lee and Tom Russell wrote: "In the US, a significant portion of recent GDP growth has been linked to AI—whether directly through investment expenditure or indirectly via the wealth effect from AI-related stocks. Any disappointment could reverberate through the credit markets via multiple channels." As investors look past geopolitical volatility and chase yields that remain high by historical standards, corporate bond spreads have narrowed to levels approaching the tightest seen since just before the 2007 global financial crisis. Even with a robust macroeconomic backdrop, the upside for bond investors appears limited, particularly as tech giants issue tens of billions of dollars in debt, potentially exerting widening pressure on credit spreads. The strategists noted that current pricing has already "fully reflected" a benign outlook for this debt asset class, a view supported by the generally healthy fundamentals of corporate borrowers in developed markets. However, the shift in premiums fails to reflect the "narrow base on which the current optimism rests." HSBC urged investors to consider diversification strategies and maintain some distance from US tech corporate bonds, pointing out that certain segments of eurozone credit have less exposure to the AI cycle. The strategists argue that most of the benefits from further upside in the US economy and AI will accrue to equity holders, rather than creditors. The report also stated that even in the event of a positive AI surprise, US private credit maintains significant exposure to high-yield software companies, whose business models could face challenges. Asian investment-grade credit may offer some protection amid potential risk-off sentiment and volatility triggered by fiscal factors. HSBC is not alone in pointing out the bias towards credit risk at current spread levels. Christian Mueller-Glissmann, Head of Asset Allocation Research at Goldman Sachs Group, said in an interview this week that "credit is the weakest link," with investors facing potential "spread carry reversal risks" related to the US dollar and the yen. He currently maintains an underweight position on credit but holds an overweight view on stocks based on earnings prospects.
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