Advisers concerned about increased bond issuance from AI ‘hyperscalers’

Advisers are becoming increasingly concerned about the potential impact of increased bond issuance from artificial intelligence (AI) hyperscalers such as Amazon, Google, and Meta, according to Rathbones Asset Management.

Its study of independent financial advisers (IFA), discretionary fund managers, and private bankers found that 94 per cent saw the potential bond supply surge as a risk for passive investors that could gain exposure without issuer-level assessment.

The concerns come as AI hyperscalers move from self-funding to issuing billions of dollars in new debt.

Rathbones Asset Management head of fixed income, Bryn Jones, said this shift towards debt issuance by AI hyperscalers highlighted 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,” he continued.

“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.”

While many respondents recognised the structural risks associated with passive fixed income strategies, just 5 per cent were familiar with the historical performance of active managers relative to passive approaches.

Over half (51 per cent) were aware of the possibility of liquidity and pricing mismatches in index-tracking fixed income strategies, while 48 per cent noted the inherent issuance-weighted bias.

Furthermore, 45 per cent said selling downgraded bonds could be a risk for passive managers and 44 per cent highlighted exposure to asymmetric return profiles as a challenge with passive investing.

“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,” Jones stated.

“Only 5 per cent of respondents are familiar with the historical performance of active managers relative to passive approaches, despite the scope for active managers to address issues such as liquidity mismatches, issuance-weighted index bias and the selling of downgraded bonds.

“This suggests there is an opportunity to look beyond the apparent simplicity of index investing and consider whether it is the most effective way to navigate today’s increasingly complex fixed income markets.”

Jones noted that the survey also highlighted how the mechanical features of passive indexing were shaping respondents’ preference for active fixed income managers.

“Almost all (96 per cent) say the requirement to sell fallen angels at the point of maximum price weakness — and then buy rising stars once prices have already tightened — affects their preference for managers who can trade these transitions ahead of the index,” he concluded.

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