What AI spending means for fixed income investors

Fixed interest investors are heading into the second half of 2026 in about as strong a position as the asset class gets. The harder question for advisers building income portfolios is different.

The AI risk in credit markets is building as the capital expenditure boom funds a growing share of credit issuance. What happens when that boom meets a slowdown?

Richard Quin, chief investment officer of Bentham Asset Management, addressed both questions in the firm’s latest quarterly market update. He says fixed interest and credit investors are in a good spot, and that returns could improve further from here.

“The base rate is close to 5 per cent, so we expect good returns over the coming few years,” Quin says. “If credit spreads were to widen further, returns could be even stronger. Syndicated loans stand out as a high-yielding investment with liquidity.”

Syndicated loans rank senior in a company’s capital structure and pay a floating rate, so their income rises and falls with the cash rate rather than moving against it.

The combination of seniority, yield and liquidity is why Quin singles them out. Bentham also runs funds in the space, which is worth keeping in mind alongside the view.

The AI risk in credit markets

Advisers do not need technology equities to capture the AI boom. Investment-grade bonds carry a large share of that exposure instead. Data centre operators and the hyperscalers building them out issue those bonds through the credit market to fund the build-out.

Quin says that build-out is accelerating faster than certainty about the earnings behind it. “There’s an acceleration in investment and capex in the space, with a lot of new data centres, and we’re seeing a large rally in equity markets around this optimism. But there is still a lot we’re not certain about. We are cautious on AI, and on the ability to deliver on such a large capex spend.”

He points to a wave of AI initial public offerings still to come. Alongside that, he estimates around US$3 trillion in venture capital and private equity deals in the space, a figure from Bentham rather than an independently audited count.

The overlap between that private capital and listed equities will be a key swing factor for the Magnificent Seven, he says. It is not yet clear whether public markets will accept the valuations that private investors set.

The debt side of the ledger is large too. Quin cites estimates ranging from $1 trillion to nearly $10 trillion in additional debt needed to fund the capex build-out. That wide range reflects how uncertain the true financing need still is. Technology, he notes, is now one of the fastest-growing sectors within the investment-grade bond universe.

Early signs of strain are already showing. The hyperscaler credit index has widened 61 basis points over the year. Quin says some credit investors think issuance demand from the hyperscalers is close to its ceiling. He is not convinced.

“I think there will always be a marginal buyer at a higher price, so if spreads go wider, there will be buyers in this space.” Bentham also flags that the Bank for International Settlements has raised similar concerns about the scale of AI-related capital deployment.

Quin is direct about how these episodes tend to play out:

“Historically, these bubbles have ended badly, and the size of this one could be spectacular.”

Tax reform is squeezing borrowing capacity at home

Offshore, the risk is AI. Onshore, Quin sees Australia’s recent budget and tax changes as a more immediate drag, estimating that borrowers’ capacity to borrow has fallen by about 20 per cent as a result.

Softer bank lending volumes and a smaller credit multiplier flowing through the economy follow from there, with a knock-on effect for bank earnings.

Housing is the transmission channel. Prices are already stretched in Quin’s view. He expects growth to flatten or fall and warns the wealth effect from that could weigh on broader economic activity.

What it means for portfolios

Three questions frame Quin’s outlook for the rest of the year: how will credit markets reprice as more AI-driven supply arrives and earnings uncertainty deepens? What does Gulf energy volatility mean for a geopolitical risk premium that has rarely been harder to model? And how far does the domestic drag from tax reform work through activity and valuations before it shows up in credit quality?

His answer, against all three, is a constructive one. If equity and other risk markets do sell off, Quin expects fixed interest to rally rather than follow them down. The advisers who get that right are the ones using credit to diversify away from equity risk rather than quietly doubling up on it.