Uncertainty as Opportunity: Navigating AI-Driven Credit Volatility

By Peter Higgins
Head of Fixed Income and Senior Portfolio Manager

Unpredictable headlines have continued unabated into 2026. This uncertainty continues to make it more difficult to proactively construct entirely macro-driven portfolios.  Uncertainty typically creates volatility, allowing active managers to react and tactically adjust portfolios targeting credit selection at lower prices. Some of the most recent headlines in the financial press may provide further opportunities for active managers to create additional alpha. 

The first notable theme is the AI CapEx-induced new issue market supply surge. Substantial amounts are needed to support the estimated ~$650bn in AI-related CapEx spend¹ by the hyperscalers in 2026.

In addition to free cash flow, issuers will tap into any and all markets of which they have access to including, but probably not limited to private credit, off balance sheet financings, securitizations, converts, equity, bank loans and, of course, the public credit markets.  As it relates to the public markets, the hyperscalers are all currently IG rated. Together Tech/AI-linked issuers in U.S. IG bond indices represent ~15%². If all ~$650bn of CapEx was funded by issuing IG debt, then the Bloomberg US Corporate Bond Index would grow by 9% this year.²

Passive investors could unknowingly be getting more and more exposure to the Hyperscalers of credit. The problem here is that credit is a fixed income product. Investors’ coupons are fixed and capital price appreciation is limited, unlike the significant equity market gains seen in the "Magnificent 7" over the past few years.

As rapidly evolving themes develop, sentiment and fundamentals can shift quickly. Active managers may be able to respond by adjusting exposures and, when primary market supply is heavy and secondary prices soften, selectively adding risk where valuations appear more attractive.

The financial press has been writing on private credit’s exposure to the software industry, as their investments into the Software as a Service (”SaaS”) sector may be significantly impacted by AI.  With BDC software exposure estimated at 21% and Direct Lending having up to 30% software in their portfolios, Alternative Asset Managers have been in the cross-hairs of a sell-off.³  With over two decades of private credit inflows, it’s just been more recent that retail investors have gained significant access to these types of investments. After already having invested billions over those ~20 years, now alternative asset managers have had to reach further into asset light industries, or non-traditional industries for debt issuance, to deploy capital; hence the heavy allocation to software companies. The fear of AI disruption to the software industry has sparked outflows, which has highlighted i) A liquidity mismatch: Direct lending investments require long-term, locked up capital. The recent phenomenon of Evergreen Funds with a modest 5% quarterly withdrawal⁴ has shown the pitfalls of this liquidity mismatch; and ii) Pricing discrepancies. Selling, or at other times, transferring investments from one fund to another fund, monetizes prices and highlights pricing discrepancies from either in-house valuators or 3rd party vendors on the same investment across different fund managers.

Risks evolve over time, and the market is currently focused on AI-related uncertainty. AI may deliver meaningful benefits, but the transition could be uneven across industries. Some business models may be challenged, and certain companies could face financial stress. Software may be in the cross-hairs of today’s sell-off, but that pressure may have contagion effects across major indices or other industries. Examples may include, but are not limited to: (i) hyperscalers that reside in non-tech sub-components - such as retail—within the S&P 500 and investment-grade credit benchmarks like the Bloomberg U.S. Corporate Bond Index; (ii) potential spillover effects for certain insurers, particularly those with strategic relationships with alternative asset managers or significant private credit exposure within general accounts and (iii) valuations correcting as pricing marks of software exposure are lowered.  Without risk, there wouldn’t be reward.  Actively managed strategies could have ample opportunities to leverage risk in the future by utilizing their guidelines to hedge out the risk and by picking and choosing the winners from the losers in these types of sell-offs.

¹ Source: Apollo

² Source: Bloomberg

³ Source: Barclays

⁴ For evergreen/semi-liquid funds, the typical quarterly redemption limit is usually in the ~2.5%–5% of NAV per quarter range.

Important information: This material is for informational purposes only and is not intended as investment advice or a recommendation to buy or sell any security. All investments involve risk, including possible loss of principal. Fixed income investments are