Goldman Sachs: AI financing shock spreads to credit markets as Goldman Sachs turns selective on bonds

How much pressure have credit funds faced recently?

As of 28 October, the 20 largest dollar investment-grade corporate credit funds and ETFs had an average total return of 1.5% over the past month, benefiting substantially from the decline in interest rates since 5 October; comparable high-yield funds returned an average of 0.6% and benefited less.
Looking separately at the 20 largest actively managed funds, the investment-grade and high-yield groups underperformed their respective benchmarks by 0.7 and 0.6 percentage points over the past month. Year to date, their average excess returns were negative 0.2% and positive 0.9%, respectively; higher coupon income from high-yield bonds helped cushion the recent drag.
These funds represent only a portion of corporate bond holders, but Goldman Sachs uses them as a proxy for tracking performance in real time.

Goldman Sachs says AI financing concerns, higher yields and geopolitical tensions have driven dollar credit spreads wider; lower-rated bonds outside the AI sector have also weakened on a relative basis. Pairwise correlations in changes in dollar credit spreads have risen to their highest level since the escalation involving Iran in the first quarter of 2026.
The bank believes that when the supply of funding needed for AI buildout is threatened and aggregate demand is affected, the shock spreads to the broader economy and credit markets, so it continues to recommend macro hedges. Hedging costs have risen, however: implied volatility on dollar credit index options is near its post-pandemic median, while that for euro credit is at the 65th percentile.
Goldman Sachs's base case remains that growth is sufficient to support investment-grade bonds and most high-yield issuers operating normally, but downside tail risks to growth are greater than before and credit spreads remain tight by historical standards, so it does not favor buying the dip across the board.

Within investment-grade bonds, Goldman Sachs prefers BBB-rated bonds to higher-rated debt and expects the recently widened rating spread in non-AI sectors to narrow. Its reasoning is that investors value sector diversification and non-AI issuance is more easily absorbed by the market.
High-yield bonds require a differentiated approach: the bank expects BB-rated debt to face more pressure from AI-related financing supply and therefore favors the coupon income on B-rated bonds, although performance within the B category could diverge more widely. For CCC-rated debt, higher interest rates, input costs and pressure on individual issuers make a near-term improvement in refinancing conditions difficult; Goldman Sachs remains underweight.
For investors across rating categories, Goldman Sachs prefers earning spread compensation by moving down the capital structure rather than further down the ratings scale, and finds corporate hybrid capital bonds and subordinated debt of large banks attractive. This view rests on its base case that growth is sufficient to support the economy and high-quality issuers retain access to capital markets.
Sector diversification is also a defensive tool: investment-grade utilities, financials and healthcare/pharmaceuticals, as well as high-yield energy bonds, have lower correlations with AI-related spreads; these assets still carry their own credit risks.

The euro credit market has benefited so far from less AI-related issuance, but higher energy prices and recent sovereign and fiscal risks have offset that advantage and driven spreads wider. Goldman Sachs therefore prefers dollar credit and recommends that euro portfolios place greater emphasis on defense and geographic diversification.
European bank bonds have underperformed non-financial corporate bonds, even after excluding French issuers. Goldman Sachs believes relatively sound bank fundamentals help prevent senior bank bond spreads from returning to the highs seen during the 2011–2012 sovereign debt crisis; the bank is underweight French banks but more positive on the broader European banking sector.
In euro high-yield bonds, Goldman Sachs favors higher ratings: more concentrated debt maturities could translate high interest rates into refinancing pressure for highly leveraged borrowers, while spread compensation in growth-sensitive sectors remains limited.