Goldman Sachs Sees Value in AI Debt, Municipal Bonds Amid Volatility

Credit markets are presenting notable investment opportunities through the end of 2026, driven by rising yields that favor high-grade artificial intelligence (AI) debt and municipal bonds, according to Goldman Sachs. The firm also points to the advantages of low market volatility for investors seeking to hedge their portfolios.

Alex Finston, co-head of US and Asia Credit Trading at Goldman Sachs FICC and Equities, discussed these trends on the company’s 'The Markets' podcast. He emphasized that despite increasing interest rates and sector-specific challenges, credit markets have shown remarkable resilience. Investors have maintained strong interest in top-tier corporate debt, especially during periods of market weakness, and Finston anticipates further opportunities as companies finalize their financing needs for the year.

"There are three main areas that stand out right now," Finston remarked, identifying high-quality AI-related credit, portfolio hedging strategies, and municipal bonds as prime sectors for investors to watch. Recent volatility has allowed buyers to access AI-linked debt at yields higher than those seen in recent years. Meanwhile, the current environment of low implied volatility is favorable for those aiming to protect their portfolios against potential risks.

Looking at market data, investment-grade credit spreads are sitting near the 10th percentile of their historical range over the last 20 years, indicating relatively tight spreads despite market fluctuations. Leveraged finance spreads are around the 25th percentile, suggesting a somewhat wider gap but still within a healthy range. Finston cautioned that the market is becoming more segmented, with AI-related borrowing, technological disruptions, and sustained interest rate increases contributing to uneven performance across sectors.

Historically, gradual interest rate hikes have attracted investors to fixed-income products, but sudden, disorderly rate moves can increase stress in credit markets. Finston noted that if borrowing costs escalate to the point where companies struggle to refinance their debts, this could put pressure on the market. He described the current period as a "credit picker's market," where distinguishing between stronger and weaker borrowers is crucial rather than applying a uniform approach.

Municipal bonds have also caught Goldman Sachs’ attention. In recent months, increased issuance has led to opportunities for purchasing highly rated municipal securities with attractive absolute yields. Tax-equivalent yields on top-tier municipal bonds have approached 10 percent, offering a compelling option for investors seeking steady income with reduced credit risk.

Finston further stated that market participants will closely observe the US Federal Reserve’s policy flexibility, the potential for significant AI-related debt deals before year-end, and the details of these transactions including their structure, duration, and geographic financing sources. The broader outlook for credit markets remains linked to the sustainability of economic growth and the availability of capital and liquidity.

Goldman Sachs’ insights come amid ongoing shifts in the credit landscape as companies adapt to technological advances and evolving economic conditions. For investors, the current environment demands careful analysis and strategic positioning to capitalize on emerging opportunities in AI debt and municipal bonds while managing risk through portfolio hedging.