Why carry or bond coupons matter more today
AI-driven sell-off shows the shock-absorbing power of carry and how high-yield bonds can reduce portfolio volatility
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RECENT developments in the US Treasury market may provide a timely backdrop for investors reassessing their fixed income allocations.
Upward pressure on yields has put a spotlight on government borrowing costs while reinforcing a key trend seen in recent months. Duration risk, not credit risk, has been the primary source of volatility across fixed income markets.
In this environment, an active, selective investment approach and a focus on coupon income or “carry” are likely to become increasingly important drivers of performance in the years ahead.
Carry as a source of income and resilience
Recent market volatility offers a useful reminder of the value of income. The AI-driven sell-off in July provides a notable example. Semiconductor equity indices declined by more than 20 per cent, yet the global high-yield market fell just 0.3 per cent.
While no asset class is immune to market stress, the episode demonstrated the shock-absorbing power of carry and how high-yield bonds can help reduce overall portfolio volatility while continuing to generate income.
This resilience was supported by two characteristics that are increasingly valuable in today’s market environment. First, higher coupon income provides a cushion against volatility.
Second, lower duration means many spread assets are less sensitive to rising government bond yields than longer-dated fixed income assets.
As sovereign bond markets remain vulnerable to shifts in fiscal policy, inflation expectations and government bond supply, investors may need to look beyond duration as the primary driver of returns.
Instead, quality spread assets offering attractive all-in yields can provide a more reliable source of income while helping to reduce reliance on favourable market timing or further declines in yields.
In our view, carry remains one of the most compelling opportunities in fixed income today.
Whether through quality spread assets, global high yield or other income-generating sectors, yield is once again available and can play a central role in total returns, particularly at a time when traditional core rate exposures are facing headwinds.
In AI, fundamentals matter more
With nearly US$500 billion of outstanding bonds from the top AI giants, or hyperscalers, and another US$100 billion linked to data centres, AI has become an important segment of the global credit market.
July’s AI-driven equity sell-off spilled into credit markets, leading to wider spreads for hyperscaler and data centre issuers. But we are not overly concerned, and view the weakness as an opportunity to add selectively to issuers where we have strong conviction in the underlying credit story.
The next phase will be driven less by spending and more by returns: capital discipline, balance-sheet strength and the ability to earn an attractive return on invested capital.
History suggests that every transformative technology undergoes at least one full capex cycle. During the telecom buildout of the 1990s, investment in infrastructure ultimately raced ahead of demand, exposing weaker and more leveraged players.
While AI’s path may differ, the lesson for credit investors is similar – not all participants will emerge as winners.
This reinforces the importance of selectivity. We continue to favour issuers with strong balance sheets, diversified business models and clear visibility on cash flow generation and deleveraging.
In the data centre segment, we see opportunities in assets supported by long-term contracts with investment-grade hyperscalers, where future revenues are more certain and cash generation can support balance-sheet improvement over time.
Ultimately, we believe recent AI-related volatility should be viewed not as a systemic crisis, but as an opportunity for active investors to distinguish between businesses benefiting from durable structural demand and those whose investment ambitions may prove harder to translate into sustainable returns.
Case for active management
As AI moves from a capex-driven story to a returns-driven one, fundamentals matter more than ever. The focus is shifting from the scale of AI investment to balance-sheet strength, capital discipline and the ability to generate attractive returns on invested capital.
We view recent weakness as an opportunity to add selectively to issuers where we have strong conviction in the underlying credit story, particularly those with resilient business models, clear competitive advantages and strong cash-flow visibility.
The writer is CIO fixed income, Allianz Global Investors. Unless otherwise stated, all data, views and opinion are as at September 2026.
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