Credit investors should be wary of potential downside risks linked to what HSBC Bank describes as “AI euphoria”, after optimism around AI helped push yield premiums to their lowest levels in decades, according to the bank’s strategists.

Corporate bond spreads are currently near their tightest levels since the period leading up to the 2007 global financial crisis, as investors look past geopolitical uncertainty and chase yields that remain elevated by historical standards.

Despite a favourable macroeconomic backdrop, HSBC believes the scope for further gains in credit markets is limited, particularly as large technology companies issue tens of billions of dollars in debt, a trend that could place pressure on spreads to widen.

In a recent report, HSBC strategists Song Jin Lee and Tom Russell said bond prices already “fully reflected” a positive outlook for corporate debt, supported by generally solid company finances in developed markets. However, they cautioned that current yield levels do not fully account for how narrowly based the market’s optimism has become.

The bank said much of the recent growth in the United States’ gross domestic product has been closely tied to developments in AI, both directly through investment spending and indirectly through rising valuations of AI-related equities. “Any disappointment in the AI outlook could spill over into credit markets through multiple channels,” the strategists wrote.

HSBC is urging investors to consider diversification strategies that reduce exposure to US technology bonds, arguing that most of the benefits from further upside in the US economy and advances in AI are likely to accrue to equity holders rather than bond creditors. The bank pointed to parts of the European credit market as relatively more attractive, given their lower exposure to the AI cycle.

The report also flagged risks within US private credit markets, noting significant exposure to high-yield software companies whose business models could be challenged even if AI developments deliver upside surprises. Asian investment-grade credit, HSBC added, may offer some protection in the event of a downturn in risk sentiment or an increase in volatility driven by fiscal policy.

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HSBC’s warning comes amid similar concerns from other market participants. Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs Group Inc, said in a Bloomberg Television interview this week that “credit is the weakest link” in current markets. He highlighted potential “carry unwind risk” linked to movements in the US dollar and the Japanese yen.

Mueller-Glissmann said he is underweight credit while remaining overweight equities, citing the earnings outlook.