AI Borrowing Reshapes the Bond Market

Outside the U.S., Japan has become another area of focus. U.S. and Japanese policymakers jointly intervened in currency markets this week to support the yen, helping the currency strengthen from around 165 to the U.S. dollar to closer to 155. The intervention, alongside comments from U.S. Treasury officials, suggests policymakers may be willing to take a more active approach to currency markets.

Despite these uncertainties, U.S. economic data remains resilient. Manufacturing activity strengthened in July, while labor market data continues to point toward gradual rebalancing rather than a sharp slowdown. Corporate earnings have also remained strong, supporting a renewed rally in equity markets.

Taken together, the data remains consistent with an economy that continues to expand without showing significant signs of overheating.

AI borrowing reshapes credit markets

One of the defining themes in corporate credit this year has been the surge in borrowing related to artificial intelligence.

AI-related borrowers issued roughly $220 billion of investment grade debt during the first half of 2026, representing approximately 18% of total issuance and already exceeding the amount issued during all of 2025.

That wave of supply is creating greater differentiation across credit markets. AI issuers have generally traded at wider spreads than the broader investment grade universe as investors absorb the volume of new debt coming to market.

Despite this, the broader credit backdrop remains healthy. Investment grade yields remain around 5.3%, while corporate leverage is close to historical lows and ratings upgrades continue to outpace downgrades.

The maturity profile of AI borrowing is also reshaping the market. Much of the issuance has been concentrated in longer-dated bonds, creating opportunities not only in corporate credit but also in adjacent areas such as securitized assets linked to data centers and other AI infrastructure.

Securitized credit highlights a K-shaped economy

We also continue to see opportunities within securitized credit, particularly given the floating-rate nature of many of these assets. This can provide some insulation when inflation remains elevated and the path of monetary policy is uncertain.

However, underlying borrower performance is becoming increasingly differentiated.

Delinquencies have risen among lower-quality borrowers, including in areas such as non-agency mortgages and subprime auto asset-backed securities. Prime borrowers, by comparison, have generally remained resilient.

This divergence provides another indication of the K-shaped economic environment and reinforces the importance of active security selection.

Overall, while policy uncertainty and market volatility remain elevated, fixed income continues to offer attractive income opportunities. A disciplined and selective approach across government bonds, investment grade credit and securitized assets remains important as market conditions become increasingly differentiated.

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