How Rising Rates and AI Issuance Are Affecting Credit Markets

Market Data & Bond Reaction:

• October 14th CPI and October 15th PPI data released, with both core and energy figures coming in higher than expected.
• Bond yields initially spiked on the "hot" data, then declined, with a sharp drop in yields occurring as the market reacted to near-term inflation catalysts.
• Market focus has shifted to the interplay between short-term inflation anxiety and the long-term AI growth story.

Corporate Credit Market Status (2026 Context):

• Corporate credit markets described as "incredibly resilient" throughout 2026, with spreads remaining tight.
• Investment grade index sits at the 10th percentile over a 20-year lookback.
• Leveraged finance stands at the 25th percentile over the same period.
• Three key drivers underpinning current volatility:
  • AI and AI supply chain investment stories.
  • Disruption from new technologies.
  • Higher-for-longer rates disproportionately impacting specific sectors.

Rate Environment & Capital Flows:

• Slow and steady rate increases are historically met with buying activity, whereas violent, disorderly moves create market agitation.
• Foreign demand for fixed income remains robust despite recent volatility.
• Credit markets remain stable provided absolute rates do not reach levels that make financing uneconomic for borrowers.
• Implied volatility across macro asset classes remains extremely low, suggesting a lack of systemic distress.

Sovereign Debt & Fiscal Concerns:

• Focus on fiscal responsibility continues, citing a $40 trillion deficit in the US and sovereign issues in France.
• The primary concern is competition for capital across diverse markets rather than a direct "crowding out" of corporate credit by sovereigns.
• Analysts characterize the current environment as a "credit picker's market" where dispersion creates winners and losers.

Specific Investment Trades & Opportunities:

• AI Credits: Opportunity to buy high-quality AI credits at wider yields than recently observed.
• Hedging: Low implied volatility presents a favorable environment for portfolio hedges.
• Municipal Bonds:
  • Heightened municipal supply over the past two months has created entry opportunities.
  • Highly rated 30-year municipal credits now offer tax-equivalent yields approaching 10%.
  • This yield level allows investors to replicate high-quality 30-year government bond (G.O.) returns at tax-adjusted premiums.

Forward-Looking Statements & Next Week's Watchlist:

• Key focus is monitoring whether the Fed retains policy flexibility amidst the inflation data.
• Market participants are anticipating potential large-scale AI financing deals between now and the end of the year.
• Analysts will monitor the structure, duration, and global sourcing of upcoming financing deals.
• The overarching narrative remains that the growth story, driven by AI, is intact and supported by constructive data.