Goldman Sachs sees credit market opportunities in AI debt until 2026

Goldman Sachs reports credit markets could offer investment opportunities through 2026, with higher yields in high-quality AI debt and municipal bonds. Low market volatility also makes portfolio hedging attractive despite rising interest rates.

Credit markets could offer fresh investment opportunities through the end of 2026, with higher yields creating opportunities in high-quality artificial intelligence (AI) debt and municipal bonds, while low market volatility makes portfolio hedging attractive, according to Goldman Sachs.

Alex Finston, co-head of US and Asia Credit Trading at Goldman Sachs FICC and Equities, said credit markets had remained resilient despite rising interest rates, increased AI-related borrowing and differences in performance across sectors. Speaking on the firm's 'The Markets' podcast, Finston said investors continued to show strong demand for high-quality corporate debt, particularly during periods of market weakness, and expected opportunities to emerge as companies approach the end of the year with financing requirements.

Top Investment Opportunities Identified

"I think there's three that are top of mind," Finston said, identifying high-quality AI credit, portfolio hedges and municipal bonds as key areas of interest.

He said recent market volatility had created an opportunity to buy high-quality AI-related debt at higher yields than seen in some time. He also pointed to low implied volatility as a favourable environment for investors looking to hedge their portfolios.

Market Health and Sector-Specific Risks

Credit markets have remained healthy through 2026, with investment-grade credit spreads at around the 10th percentile of their range over the past 20 years, Finston said, while leveraged finance spreads were around the 25th percentile. However, he cautioned that conditions were becoming increasingly differentiated across sectors, reflecting the impact of AI-related borrowing, technological disruption and persistently higher interest rates.

Finston said gradual increases in interest rates had historically attracted buyers to fixed-income assets, while sharp and disorderly movements could create greater market stress. Credit markets could also face pressure if borrowing costs rose to levels that made refinancing economically unviable. He described the current environment as a "credit picker's market", in which investors would need to distinguish between stronger and weaker borrowers rather than treat the market uniformly.

Spotlight on Municipal Bonds

Finston also highlighted municipal bonds, saying increased supply over the past two months had created opportunities to purchase highly rated securities at higher absolute yields. Tax-equivalent yields on high-quality municipal bonds were approaching 10 per cent, he said.

Future Outlook and Key Factors

Finston said investors would monitor the US Federal Reserve's flexibility, the possibility of large AI-related debt deals before year-end and the structure, duration and geographical sources of financing for those transactions. He added that the sustainability of the broader economic growth story would remain central to market performance, while the availability of capital and liquidity continued to support the outlook for credit markets. (ANI)

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