Professional investors are concerned about the increased issuance of bonds from artificial intelligence hyper-scalers, according to research from Rathbones Asset Management.
Researchers spoke to a pool of IFAs, discretionary fund managers and private bankers and found 94% see the potential bond supply surge as a risk for passive investors that may gain exposure without issuer-level assessment.
More than half of those questioned (51%) are aware of the possibility of liquidity and pricing mismatches in index-tracking fixed income strategies, while 48% noted the inherent issuance-weighted bias.
Around 45% said selling downgraded bonds, or ‘fallen angels’, can be a risk for passive managers, while 44% saw exposure to asymmetric return profiles as a challenge with passive investing.
Rathbones said participants also recognised ‘the structural risks associated with passive fixed income strategies’, but just 5% said they are familiar with the historical performance of active managers relative to passive approaches.
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Bryn Jones, head of fixed income at Rathbones Asset Management, said: “This shift towards debt issuance by AI hyperscalers highlights a potential blind spot for passive investors.
“As companies such as Amazon, Google and Meta turn increasingly to bond markets to fund significant AI infrastructure spending, a rise in new supply could see index-tracking strategies absorb more of that debt without assessing whether the underlying credit risk represents good value.
“For active fixed income managers, this creates an opportunity to scrutinise the fundamentals, pricing and sustainability of that borrowing rather than simply following an index,” he added.
“While fund selectors recognise many of the structural limitations of passive fixed income, there is still a significant knowledge gap around the potential role of active management.”
