JPMorgan Chase reports that bonds related to artificial intelligence (AI) have expanded to $1.2 trillion in size, becoming the largest sector in the investment-grade market.

JPMorgan analysts Nathaniel Rosenbaum and Erica Spear stated in a Monday report that AI companies' share of the US investment-grade bond market has risen from 11.5% in 2020 to 14% currently, surpassing the US banking sector, which was previously the largest sector in the JPMorgan US Liquid Index (JULI) at 11.7%.

The analysts identified 75 companies closely related to AI across technology, utilities, and capital goods sectors, including Oracle, Apple, and Duke Energy. Many of these companies are frequent bond issuers, with technology companies maintaining abundant cash reserves and very low net debt ratios. They noted that related bond spreads stand at 74 basis points, 10 basis points tighter than the overall JULI index.

Since ChatGPT launched the modern AI wave three years ago, equity valuations of AI-related companies have soared as investors rush to bet on this technology that could potentially reshape the global economy. This has also sparked market concerns that large technology companies may be overvalued, and if their earnings stumble, it could trigger broader selloffs.

"AI-related bonds have grown rapidly, but there are good reasons for the tight spreads," the analysts wrote. They pointed out that many of these companies are high-quality issuers, either cash-rich or with low leverage ratios, and may be subject to strict regulation, thus performing better.

"The rapid rise in AI stocks has made some credit investors somewhat uneasy, as they worry that a stock market downturn could affect credit markets," the analysts wrote. "From a fundamental perspective, such concerns are unfounded."

Nevertheless, they indicated that a selloff in AI-related stocks would also impact credit markets, as their spreads are already tight. Risks exist if these companies use substantial cash for capital expenditures or mergers and acquisitions before repaying debt.

"We believe that for cross-asset portfolios, selectively shorting credit default swaps (CDS) could serve as a lower-cost tail risk hedging strategy," they stated.