Fidelity’s Durance Is Shunning Tech Bonds Feeding the AI Boom

Fidelity International’s James Durance doesn’t want AI bonds.

As hyperscalers flood the market with debt to fund the artificial intelligence boom, the London-based portfolio manager overseeing $14 billion in assets has kept tech exposure across his income strategies below 2%. By the end of next year, he says lending to the sector could grow so large that its size becomes a risk in itself.

“I don’t really favor the tech space despite the fact that it’s growing in the bond market quite a lot,” Durance said in an interview from Singapore. “I dislike it at the moment at current levels.”

Companies such as Amazon.com Inc. and Alphabet Inc. are borrowing so much to invest in AI that they’re competing with US Treasuries for capital and helping push long-term yields higher, reversing the usual dynamic. And the debt deluge shows little sign of easing, even as payoffs remain uncertain and safety concerns have prompted leaders of some of the biggest firms to call for slower AI development.

Durance is lead manager on Fidelity’s Global Income, Global Short Duration Income and Global High Income strategies and jointly runs its European High Yield franchise. His global income and short duration funds are benchmark agnostic.

“We can just not invest,” said Durance, whose short duration fund posted a 6.7% return over three years to August. “A benchmark manager is looking at that underweight potentially getting bigger and bigger and bigger if they’re not buying it, so they’re kind of forced to look at it, whereas we don’t need to.”

The caution looks prudent. A Bloomberg gauge of tech company debt has lost about 2.4% over the past year, compared with the wider global aggregate index’s 1.3% loss.

Read more: AI Risk Is Everywhere and It’s Making CIOs Nervous

One of the market’s most underpriced risks, according to Durance, is how the AI capex boom matures. The bet could pay off in productivity gains and growth, but if it fails to deliver adequate returns, it could weigh on growth expectations and hit risk assets. He noted that spending commitments for this year and next are enormous, and companies haven’t guided beyond that.

What Bloomberg Strategists Say...“Hyperscaler debt remains much smaller than Treasury issuance in outright terms, but its average weighted duration is disproportionately large.”— Alyce Andres, Markets Live strategist

“It’s not my base case that the world is going to go into a recession because of this, but I think it is a risk factor,” he said.

Durance is instead putting money into UK corporate credit, across investment-grade and high-yield bonds from banks and companies. He said the market has delivered some of the best total returns in fixed income credit this year despite gilts’ reputation as the most volatile or worst performer on bad days.

In emerging markets, he favors hard-currency debt — bonds issued in major currencies such as the dollar instead of the local currency — in some Turkey companies, including Akbank TAS and Turkcell Iletisim Hizmetleri AS. He also has positions in sovereign bonds from Mexico, Romania and the Philippines.

“What we invest in is not the kind of racy stuff,” he said, pointing out that emerging-market borrowers have broadly cut debt even as their developed-market peers pile on more, much of it driven by tech.

“By the end of next year, the amount of tech-related debt in the system is going to be like a systemic issue,” he added.