Artificial intelligence-related borrowing is becoming a larger share of long-dated U.S. corporate debt — prompting investors to look beyond Big Tech for credit diversification. Investors could consider agency mortgage-backed securities, higher-rated private mortgage bonds and emerging market debt as credit portfolio diversifiers in a corporate debt market increasingly shaped by the AI build-out, according to Lotfi Karoui, managing director and multi-asset strategist at PIMCO. Karoui said AI-related bond issuance now weighs heavily on the broader debt market. Such borrowers now account for almost half of year-to-date gross issuance of non-financial U.S. investment-grade debt with maturities beyond 15 years, PIMCO said in a note Nov. 10. AI hyperscaler debt issuance is projected at around $250 billion in dollar-denominated bonds this year, according to Goldman Sachs forecasts. Estimates for the wider AI ecosystem debt issuance this year — which includes chipmakers, utilities and data center developers — range between $300 billion and $570 billion. There are growing concerns about an AI build-out slowdown prompted by the Democrats’ sweeping victory in the U.S. midterm elections, which could pose a headache for long-duration investors looking for diversification, particularly as longer-dated U.S. Treasurys — the traditional duration portfolio hedge — have been rattled by volatility for much of 2026. “For most of the past 3 years, the AI investment boom has been an equity story, but it is increasingly becoming a bond-market story,” said Kevin Thozet, a member of Carmignac’s investment committee. “The numbers are becoming too large for bonds investors to ignore.” Karoui said that within corporate credit, financials offer a large pool of IG exposure with much less direct sensitivity to the AI capex cycle, while “old economy” sectors such as energy can play a similar role in high-yield (HY) markets. “Both, however, are expensive, in our view,” Karoui said. “Their spreads above like-maturity Treasuries generally appear tight relative to their risk-adjusted return potential.” “Instead, we see other opportunities with more favorable diversification characteristics for investors wary of AI-related investment themes.” Agency mortgage-backed securities Mortgage-backed securities backed by U.S. home loans guaranteed by government-sponsored enterprises like Freddie Mac and Fannie Mae have proved more resilient to higher rates and rate volatility this year compared with 2023, Karoui said. The note referenced PIMCO and Bloomberg data highlighting a 33-basis-point pickup in agency MBS over U.S. investment-grade corporate spreads as of Nov. 5, but without the same exposure to corporate borrowers. “In the U.S., high-quality securitized products such as agency mortgage-backed securities and non-agency residential MBS may provide meaningful uncorrelated exposure to the AI theme while still offering decent excess carry versus the broader investment grade market,” Karoui said. Higher-rated private mortgage bonds PIMCO also pointed to senior, AAA-rated portions of bonds backed by mortgages that do not qualify for the Qualified Mortgage category under federal ability-to-repay rules. Here, Karoui said that in AAA-rated non-qualified mortgage tranches, the “potential benefits likely outweigh risks.” Specifically, the risk stems more from repayments taking longer than expected, rather than the risk that borrowers will fail to pay. That risk has pushed returns higher, while certain newer deals are structured to repay senior investors more quickly and offer protection against losses. “We think the repricing in AAA non-QM creates an intriguing opportunity,” Karoui said. “Wider spreads largely compensate investors for extension risk and structural risk tied to materially higher expected credit losses, and today’s new issues embed better mitigations against those risks than earlier deals.” Emerging market debt Bonds issued by emerging market governments and companies offer another diversification play to U.S. Big Tech. “Although there are pockets of EM with meaningful AI exposure, notably South Korea and Taiwan, much of that is an equity story rather than a fixed income one,” said Karoui. “For bond portfolios, EM debt therefore remains a relatively differentiated source of yield, duration, and country-specific risk.” He zeroed in on U.S. dollar-denominated emerging market investment-grade “semi-liquid” bond deals — used to finance infrastructure investment — noting they have offered a median pickup of around 40 basis points this year compared to plain vanilla EM bonds. He also flagged opportunities beyond the main benchmarks, including in commodity-exporting countries, while noting that in local-currency bonds, exchange-rate swings can add to returns or erode them. “To be clear, it is not that EM is a lower-risk asset class. Rather, it is that EM debt is exposed to a mix of political, fiscal, and monetary forces that are different than the risks facing the domestic U.S. market,” Karoui said.
AI debt boom reshapes credit diversification
