According to analysis by RBC Global Asset Management, the net issuance of high-grade bonds is expected to reach an unprecedented $1 trillion this year. The market will need to attract additional investor participation to absorb approximately $300 billion in new bond supply; otherwise, the U.S. corporate bond market could face selling pressure. Andrzej Skiba, head of U.S. fixed income at RBC's BlueBay Asset Management, noted that against a backdrop of a steepening yield curve, the spread between long-term and short-term bonds has widened significantly. This is expected to drive an estimated $200 billion in capital migration from money market funds into the corporate bond market. He further explained that, in addition to money market funds, redemptions from mortgage-backed securities (MBS) will also serve as a significant supplementary source of this incremental capital. He added that if new capital cannot be attracted to cover financing needs related to AI data center construction debt and merger and acquisition activities, the average spread on high-grade bonds could widen by 20-30 basis points amid repricing in the technology sector and other industries. Despite risk premiums hovering near multi-decade lows, secondary markets are already showing signs of slowing demand. For example, last week's bond issuance by Oracle completed a $25 billion offering across eight tranches, attracting investor orders exceeding $129 billion, a record high for such an issuance. However, although the new bond's spread briefly narrowed below secondary market levels, market sentiment subsequently reversed. As hyperscale cloud service providers disclosed new investment plans, coupled with expectations that the four largest U.S. tech companies will invest approximately $650 billion in data center infrastructure this year, concerns over a surge in tech spending rapidly intensified. This ultimately led to a renewed widening of Oracle's new bond spread. On Monday, Alphabet raised $20 billion through a U.S. dollar bond issuance, exceeding the initial expectation of $15 billion. The bond sale by Google's parent company attracted over $100 billion in orders. Skiba stated in an interview, "The size of the new issue book is ultimately irrelevant because all demand can disappear in an instant. Don't be swayed by the demand for any specific transaction; focus on the market's reaction to the broader narrative." He and his team are less positive on credit than in recent months but maintain an overweight position as they anticipate the market may be able to absorb the new supply. He indicated that investors who invest cautiously during issuance cycles and operate flexibly during borrowing windows can still find some discounted opportunities. Skiba sees opportunities in corporate hybrid bonds, which combine features of both debt and equity. Since Moody's updated its policy in 2024 to simplify the process for determining how much of a hybrid bond issuance should be considered equity, the volume of such bond issuance in the U.S. has been climbing. Skiba advised that investors should avoid bonds from sectors where spreads are near their multi-year tightest levels, as well as bonds with specific sector issues, such as those from Business Development Companies (BDCs). BDCs have been under pressure due to their significant investments in software companies whose business models could be disrupted by artificial intelligence. What might cause him to reduce credit exposure? If new capital fails to materialize to absorb the impending wave of debt, economic growth slows, inflation re-emerges, and large-scale layoffs occur in the U.S. He added that investors also need to understand that under a potential Federal Reserve Chair nominee Kevin Warsh, appointed by Donald Trump, the so-called "Fed put" could be significantly weaker than in the past. This refers to the market belief that the Fed will intervene to support markets during a major downturn. He stated, "Our market has become accustomed to policymakers riding to the rescue at the first sign of drama, but that won't be the case this time." Skiba believes that even if a supply-driven spread widening occurs, the magnitude should not be too large. This is because financial markets have become accustomed to buying on dips (betting on price rebounds), so unless significant geopolitical turmoil occurs, the risk of spread widening has largely been priced in in recent years.