Goldman Sachs Chief Credit Strategist Amanda Lynam Talks Fixed Income

SPEAKER_1 (0:02)

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Paul Sweeney (0:07)

Let's talk the bond market, let's talk credit.

And, you know, the story of 2026, one of the main themes has been all the new issuance from the AI players. A lot of tech companies who you don't normally see in the bond market, because they have such tons of cash on their balance sheet, lots of free cash flow, they didn't need the bond market. Now they do for all this AI capex. What's that mean for the investment-grading bond market? For that, we turn to Amanda Lynam. She's a chief credit strategist at a little shop called Goldman Sachs. Amanda, how do you guys think about all the AI issuance that has come into the market and that is expected to come into the market over the next 18 months or so?

Amanda Lynam (0:46)

Good morning. Thank you for having me. So I think there are a couple of ways to think about this, Paul. One is to just frame the scale and scope, and you rightly point to the group of hyperscalers that have been in focus for the past 18 months or so.

But actually, our work suggests that as sizable as those capex needs are from the hyperscalers, they represent just 40% of the AI-related issuance that's coming through the global corporate credit markets. So given that swift acceleration, which actually started in 2025, it's intensified through 2026

We've counted nearly 600 billion of global AI-related debt issuance so far this year, and we think it's poised to accelerate even further in 2027 What that means is that the diversification value of sectors outside of that theme, so banks, healthcare, energy, food and beverage, it's all the more important for investors. And so that's really, I think, a key driver of the increased focus on sector diversification from here.

Jess Menton (1:43)

Talk to us more about the bifurcation between AI-related spreads in the rest of the market and how you view kind of the trajectory of this in the midst of the Fed beginning to hike rates again.

Amanda Lynam (1:54)

Sure. Thank you, Jess. It's a great question. I think the bifurcation has persisted. And as you noted, it's really between AI and the broader rest of the market. I think what it has driven in our view is almost a shift in the way that we think investors should think about quality and being defensive in the credit market. And that's true in both IG and high yield. And so one of the views that we have is to selectively move down in credit quality in IG, where we're overweight triple Bs against the higher rated cohorts of the market. And in high yield, for example, in the US, we're overweight single Bs versus double Bs. It's really driven by two factors, and it speaks to this bifurcation.

While the reflex historically to be more defensive or move up in quality was to move up in ratings, if you do that in this environment, what you do is you subject yourself to two more pronounced headwinds. The first is the supply angle that we mentioned, and the second is a duration headwind. On the supply angle, the higher end of the IG and high yield rating cohorts have generated a disproportionately large share of supply relative to prior years. And again, that's driven largely by the AI theme, even in high yield. And then two, by moving up in ratings and moving into tighter spread bonds, what you do is you lose that spread cushion to buffer total returns from higher rates. And so for that reason, we actually like being selectively down in credit quality. Of course, very mindful of kind of that left tail of the credit market that seems to persistently lag. But growth is good enough in our view, credit fundamentals are solid. And really it just fits with our view that if you're allocating to credit, you should be doing that for yield and income, not for a potential total return boost from tighter spreads or lower rates.

Paul Sweeney (3:37)

Amanda, you have some of the best tech research analysts on global Wall Street there at Goldman Sachs. What are they telling you about the need for more capex? How long does this cycle last? How long is your investment grade market going to be asked to fund a lot of this stuff?

Amanda Lynam (3:54)

We sure do have the best equity research tech analysts.

So our debt issuance forecast for 2027 and even through the outer years, they're directly informed in large part by the capex estimates of our equity team and then we assume a share of that capex spend that will be debt financed. As you know, Paul, this is a multi-year trend. This is something that it's not going to be kind of a one and done wave of issuance. We expect this to be a present theme in the corporate credit markets through 2030, even 2031 based on the capex trajectory that we see. I think the key angle though is that over time as that market issuance pattern extends, we think that other markets, in particular, other financing channels will need to play a larger role in financing some of this need, specifically the private credit markets, private infrastructure, private real estate, where there's a collective 4.5 trillion of dry powder across all private market strategies, even including private equity.