While the AI boom may prove to be transformative, the high-yield market may not be the best place for it to be financed.
High-yield investors do not need to participate in the AI boom. Sitting it out may prove a wise decision.
Over the summer, more than one of our clients asked whether we invest in any high-yield bonds directly related to AI. Our response was simple: no.
This is not because we are AI denialists. It’s simply because we think debt instruments are unsuited to investing in potentially transformative technologies where the economics and location of value creation are so uncertain. Should the utopian predictions about AI come to pass, then AI companies’ bondholders won’t see much of the upside. But if investment in AI proves to be uneconomic, then bondholders would be exposed to 100% of the downside.
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