The AI Boom Hits the Bond Market

Summary

J.P. Morgan's Gabriela Santos argues AI remains the dominant market theme but concentration makes recurring AI selloffs likely. She recommends diversification into European equities, Treasuries, gold and core real estate, and in fixed income prefers the short end of the curve as long-end yields reprice term premium. She also highlights how AI-related corporate debt is spreading AI risk into bond portfolios and identifies security and resilience as a second secular theme.

• AI remains the biggest global market theme, backed by a $5.5 trillion capex buildout and visible profits.
• Recurring AI selloffs are inevitable; the July shock hit momentum, global semis and Korean equities hard.
• Diversification should focus on European equities, Treasuries, gold and core real estate because few areas have different return streams.
• The rise in long-end yields is a term premium adjustment driven by government and corporate debt issuance and less central bank clarity, not inflation.
• She prefers the short end of the Treasury curve because it offers value and lower volatility than the long end.
• New tech investment-grade issuance offers roughly 100 basis points of extra spread but increasingly complex structures require single-security analysis.
• Security and resilience is the second massive secular theme, with governments raising defense and infrastructure spending.
• Geopolitical uncertainty and the Strait of Hormuz are pushing energy supply-chain reorganization.