Tim Leary, Senior Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how liquid credit markets are showing stability, but AI-driven uncertainty is hammering leveraged loans—especially in software—while stronger balance sheets in high yield and investment grade bonds continue to perform.
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Hello & welcome back to The Weekly Fix. My name is Tim Leary & I’m a Senior Portfolio Manager on RBC’s BlueBay Leveraged Finance Team in Stamford, Connecticut.
Today is February 10th, and liquid bond markets remain in a good place. High Yield Spreads are sitting at 287 over, US investment grade spreads at 76 over, and while there isn’t really enough value on the table in spreads alone to drive a rising tide-type gap higher in near term returns, Liquid Corporate credit is doing exactly what it should – by providing a lower volatility way of generating income in safe, transparent and trade-able markets. US HY retail accounts saw inflows of 421mm last week but are still seeing a small net outflow on the year, while inflows to loan funds YTD have been driven by CLO ETFs.
If there is a source of pain or anxiety in leveraged credit, it’s squarely on the shoulders of software & tech. About 15% of the US Loan market is in technology and 13.8% of it is in Software alone. Private credit is north of 20% software. Compared to US HY where less than 5% is software, AI related angst is driving negative price action in US loans to a much greater degree. It’s been said that AI is the equivalent of the invention of the printing press, but not enough people know how to read yet. Businesses are working to embrace the new world where AI automates human tasks like coding, and the market is struggling to assess which software companies will adapt and thrive and which will be left on the outside looking in. In software loan land, the last two weeks felt more like shoot first ask questions later, which was understandable as so many of these loans are over levered and were trading with little price upside to begin with. The impact isn’t exclusive to software alone. As big tech expands their capex budgets to drive AI related growth, demands on energy and the costs associated with it are expected to skyrocket. The IEA expects electricity demand from Datacenters alone to double in the US from 2025 to 2030 compared to 2020 to 2025 which works out to 50% of the growth expected in overall US energy demand. The credit markets are working through what this all means. Strength of balance sheets always matters but tend to get the most focus during times of uncertainty. US loans and private debt are in the eye of the storm. The JP Morgan loan index is down 46bps YTD while US HY and US IG are both up about 60bps. Better balance sheets, transparency and access to various markets, whether it’s public equity or bond, has driven better performance across HY & IG. While we still prefer bonds over loans as a whole, there are certainly opportunities for individual credit stories to perform in both markets.
As always, thanks for your time & good luck trading
Key points
Liquid credit markets remain stable with tight spreads, providing low-volatility income generation, though minimal spread value limits near-term upside potential.
Software and tech loans face significant pressure as AI disruption creates uncertainty about which companies will adapt.
Energy demand from AI infrastructure is set to explode with datacentre electricity consumption expected to represent 50% of US energy demand growth by 2030.
