Global Credit Markets Wobble as War Deepens AI-Triggered Selloff

i}md)70qfga15bt75zm6wkyp_media_dl_1.png Bloomberg

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(Bloomberg) — Credit risk indicators spiked on Monday as escalating tensions in the Middle East rattled markets already strained by concerns about artificial intelligence and private credit.

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In the US, a measure of perceived risk for investment-grade bonds opened Monday at its highest levels since June and fluctuated between gains and losses during morning hours in New York. The index rises as perceived credit risk climbs. 

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Across the pond, measures of European firms’ credit risk surged the most since October in early-session trading and remain elevated, with trading volume in both the high-grade and junk credit-default swap indexes at least six times more than the average, according to data compiled by Bloomberg. 

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The moves come as military strikes intensified in the Middle East, with blasts heard across Israel, Saudi Arabia, Qatar and the United Arab Emirates. US President Donald Trump said the bombing campaign against Iran could last for weeks. 

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Meanwhile, the primary debt markets in both regions ground to a halt. In the US, all 15 borrowers — including a jumbo issuer — slated to sell new high-grade bonds on Monday stood down, according to an informal poll of syndicate underwriters. In Europe, there were no euro, pound sterling or dollar deals launched.

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Also on Monday, Treasuries fell as the price of oil surged the most in four years, stoking fears that inflation will accelerate and force traders to scale back wagers on the scope of US interest-rate cuts.

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The developments are adding uncertainty to an already-fragile credit market as investors worry that AI could disrupt the software sector and other industries. Risk premiums on high-grade global corporate bonds rose 0.85 percentage point last week, the most since Trump’s so-called Liberation Day tariff announcement convulsed markets in April. 

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In addition, private credit funds in particular have been under intense scrutiny after Blue Owl Capital Inc. blocked redemptions in one of its funds and sold a $1.4 billion portfolio of loans to return capital to investors. Warnings from activist investor Boaz Weinstein about the “wheels coming off” the $1.8 trillion market also fed into the angst.

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The jump in credit risk gauges this morning indicated a risk-off mood after the weekend conflict, said Mark Clegg, a senior fixed-income trader at Allspring Global Investments. Still, a move higher in Treasury yields is helping boost high-grade debt as yield-driven buyers continue to underpin the market, he added.

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“Investors have to stay nimble as we saw last April at the onset of the tariffs,” said Clegg. Issuers that were hesitant to launch deals on Monday are likely “on calls with dealers all day to plan for tomorrow.”

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Debt issued by companies in the logistics sector could suffer due to supply chain disruptions at the Strait of Hormuz — a key passage for oil tankers — while energy and defense credits could benefit, according to Slawomir Soroczynski, head of fixed income at Crown Agents Investment Management. Still, the broader sentiment across credit remains challenged due to expensive valuations and over-leveraged positions, he added.