Under the impact of AI, is a new round of "subprime crisis" coming?

``` Concerns sparked by the disruption of artificial intelligence technology are quickly spreading to the global credit bond market. From leveraged loans to collateralized loan obligations (CLOs), a wave of asset sell-offs in various market segments is raising investor awareness of a potential systemic credit cycle. According to Bloomberg Index, the yield spread on comparable global debt has recently widened by nearly 4 basis points, marking the largest increase since early November last year. The investment-grade bond market, long seen as a safe haven, is showing signs of stress. The spread for investment-grade technology stocks has widened rapidly, and for the first time since the global financial crisis, the stability of the tech sector is considered lower than the broader investment-grade index. Meanwhile, Wall Street institutions are warning that the default risk for highly-leveraged AI and software industry borrowers is rising. Investor anxiety has turned into actual sell-offs. Not only have leveraged loans in the technology sector underperformed the overall market, but U.S. junk bond funds have also experienced continued outflows in recent weeks, putting an end to several months of gains in high-yield bonds. Although volatility in high-rated credit metrics remains relatively mild, the high correlation between private credit and the public market means that if core sectors like technology are hit, the default risk will quickly spread, affecting the wider global credit bond sphere. Recent market data show that in February of this year, the average price of the Bloomberg U.S. Leveraged Loan Index fell by 1.34%, the largest single-month decline since September 2022, mainly dragged down by software and services sector loans, resulting in large amounts of distressed debt. Meanwhile, JPMorgan has warned that U.S. CLO asset pools totaling $40–150 billion are now facing the impact of AI disruption risks. Investment-Grade vs. High Yield Bond Spread Fluctuations The investment-grade bond market, once seen as a safe haven, is now showing unusual cracks. According to JPMorgan, AI-related companies now make up 14% of the investment-grade index, with debt swelling quickly to $1.2 trillion—surpassing the U.S. banking sector to become the largest component of the index. As market pressures mount, the spread between tech investment-grade bonds and the broader index has widened substantially. The fissure in credit bonds is going global. According to Bloomberg Index, Asian investment-grade dollar bonds have recently seen the largest one-week gain in spreads since last November. Clement Chong, Head of Fixed Income Credit Research for East Asia Investments, stated that Asian market valuations have tightened in step with the U.S., making them unable to escape the impact of local volatility. Junk Bonds and Leveraged Loan Markets Under Pressure With increasing concerns about default risks in the software sector, higher-risk credit segments are being hit first. A wave of sell-offs has hit newly issued high-yield bonds, pressuring junk bond prices. According to LSEG Lipper data, U.S. junk bond funds have suffered consecutive weeks of outflows. Additionally, leveraged loans in the tech sector have also underperformed, declining more than the broader U.S. and European leveraged loan indices. Recent credit market events, such as the collapse of UK mortgage lender Market Financial Solutions, and earlier bankruptcies of First Brands Group and Tricolor Holdings, have intensified concerns over loose underwriting standards in credit bonds, triggering speculation over the re-pledging of assets. Spillover Risk Between Private Credit and Public Markets The deeper worry in the market is that private credit could pose systemic contagion risks. UBS warns that because borrowers frequently fund themselves in both private and syndicated loan markets, there is a high degree of overlap in issuer and sector exposure. Data show that the service and tech sectors make up 15–20% of leveraged loan portfolios, a distribution highly consistent with the private credit market. UBS credit strategist Matthew Mish points out that the top 20 direct lending institutions not only dominate private credit assets under management, but also hold substantial positions in business development companies (BDCs), leveraged loans, and high-yield bonds. This close interconnection means that if the AI shock causes default rates in software and related industries to surge, the contagion effect will quickly spill over into public markets, leading to wider spreads and impaired liquidity, posing a real test to the capital adequacy of global banks and insurers during downturns. Matthew Mish summarizes in his report that while the private credit market has not yet entered a full-blown crisis, the seeds of crisis are already present. The key trigger would be a hit to major sectors like software. Due to high leverage, industry concentration, and limited transparency in private markets, accurately assessing macro risks is extremely difficult. Investors must closely monitor leading indicators such as default rates and valuation changes to guard against potential systemic risks. Leveraged Loan Market Cools Sharply As a key financing source for below-investment-grade companies, leveraged loans are bearing the initial brunt of the AI shock. According to Bloomberg, concerns over traditional business models being disrupted by AI have put borrowers heavily reliant on software operations at the forefront. As loan prices have dropped to their lowest levels in months, new U.S. loan issuance has plummeted to its lowest level since May of last year. JPMorgan strategists note rising refinancing risks in the software sector. Data indicates that about $51 billion in software debt rated B- or below will mature in 2028, with another $50 billion maturing in 2029. Given the limited current capacity of the private credit market to absorb syndicated assets, these debts face severe refinancing challenges ahead. CLO Asset Pools Sound the AI Risk Alarm Risk from leveraged loan underlying assets is transmitting directly to structured products. Previously, the release of Anthropic PBC’s powerful Claude chatbot triggered a sell-off in software loans, prompting CLO managers to urgently assess AI exposure in their portfolios. According to JPMorgan, about $40–150 billion worth of CLO loans are at risk due to their high exposure to sectors impacted by AI. JPMorgan strategist Rishad Ahluwalia argues that, beyond focusing solely on the software sector, investors should consider the broader credit risk impact that AI disruption brings to CLOs. The strategists note that even though economists expect the penetration of AI into the economy to be gradual, excessive leverage in the financial market’s AI bets could trigger an uncomfortable reset of expectations. Risk Disclosure and Disclaimer The market carries risks, and investments should be made with caution. This article does not constitute personal investment advice and has not considered the specific investment goals, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suited to their personal circumstances. Investment decisions based on this article are at one's own risk. ```