James Durance at Fidelity International is steering clear of AI-related bonds. As hyperscale cloud providers aggressively borrow to fuel their artificial intelligence investments, this London-based portfolio manager, who oversees $14 billion in assets, has kept his technology sector exposure below 2% in his income strategies. He warns that by the end of next year, lending to this industry could balloon to a scale that itself poses a systemic risk.

Speaking in Singapore, Durance remarked: "While the tech sector is rapidly expanding in the bond market, I'm not particularly enthusiastic about it. At current price levels, I don't find it appealing." Companies like Amazon and Alphabet Inc. are borrowing heavily to invest in AI, to the point where they are competing with U.S. Treasuries for capital, pushing up long-term yields and turning market norms on their head. Despite uncertain investment returns and safety concerns that have prompted some major corporate leaders to call for a slowdown in AI development, this wave of debt issuance shows little sign of abating.

Durance serves as the lead manager for Fidelity's Global Income, Global Short Duration Income, and Global High Income strategies, as well as co-manager of the European High Yield strategy. His global income and short-duration funds are not constrained by benchmark indices. "We can simply choose not to invest," Durance explained. "Benchmark-driven managers who don't buy in risk facing increasingly large underweight positions, so they feel compelled to purchase. We don't have that pressure." His short-duration fund has delivered a three-year return of 6.7% as of August.

This cautious approach appears justified. Over the past year, a Bloomberg index tracking technology company bonds has fallen more than 2%, while the broader global aggregate bond index has declined 1.3% over the same period.