Resilient Income
Fixed Income Forward: August 2026
Carry wins in an AI-driven market
“Machines take me by surprise with great frequency.” – Alan Turing
Key takeaways
- Carry cushioned the AI shock. While semiconductor equities fell over 20% in July, global high yield declined just 0.3% (source: Bloomberg, August 2026). This shows the resilience and shock absorbing power of income.
- AI remains the megatrend, but fundamentals matter more. 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.
- The case for active is stronger than ever. With rates, policy paths and growth cycles increasingly diverging, investors need global flexibility, disciplined risk-taking and active management to capture opportunities and navigate volatility.
What happened in July
July was marked by volatility in oil markets and AI-related equities. Renewed tensions in the Middle East pushed Brent crude back above USD 100 per barrel. As geopolitical concerns eased, focus shifted to second-quarter earnings. A selloff in semiconductor stocks was amplified by the unwinding of leveraged single-stock exchange-traded funds and hedge fund positions, while higher energy prices and resilient economic data drove bond yields higher. Major central banks kept policy rates unchanged but maintained a hawkish stance. The month ended with a bang in currency markets, as US-Japan intervention sought to halt the yen's slide after it reached a 40-year low against the dollar.1
Our take on investment implications
With nearly USD 500 billion of outstanding bonds from the top AI giants, or hyperscalers, and another USD 100 billion linked to data centres (source: Bloomberg, August 2026), 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.
History suggests every transformative technology undergoes at least one full capex cycle. In the 1990s telecom boom, massive investment in fibre infrastructure raced ahead of demand, ultimately resulting in high-profile failures. Being right too early, and too leveraged, proved costly. We believe AI is likely to follow a similar, though not identical, path. The biggest casualties typically lie with overleveraged players, late entrants, and businesses lacking scale or competitive advantage or clear differentiation.
As credit investors, our approach is consistent: we are fundamentally driven, conduct independent research, maintain a selective investment process, and apply disciplined risk management. We remain positive on the top hyperscalers. Despite spread widening due to issuance indigestion and technical market pressures, their strong balance sheets, diversified business models and substantial rating headroom continue to support resilient credit profiles. In data centres, we favour issuers backed by long-term contracts with investment-grade hyperscalers, clear paths to project completion, and strong visibility on free cash flow generation and deleveraging.
Away from AI, volatility across fixed income markets is driven more by rates (duration) risk than by credit (spread) risk, reinforcing our preference for tactical and relative value trades in core rates over large directional bets. Yield curve trades, which seek to capture differing moves across maturities, remain one of our preferred sources of alpha. We favour steepeners across major sovereign bond markets, although the investment rationale differs by region. Diverging contexts not only support steeper curves but also create relative value opportunities.
In a reflationary world with higher interest rates, a global multi-strategy approach that identifies resilience and alpha opportunities across fixed income sectors can provide diversification2 and act as a shock absorber. For strategic allocations, we favour quality spread assets offering attractive all-in yields, where carry remains a powerful source of income. Investment-grade floating-rate notes, predominantly issued by financial institutions, may be a compelling portfolio anchor, offering attractive income and protection against rising rates.
We also believe high yield bonds can help dampen equity market volatility while enhancing portfolio income. July showed the resilience of carry: semiconductor equity indices fell more than 20%, yet the global high yield market declined 0.3% (source: Bloomberg, August 2026), outperforming the broad investment-grade market. Lower duration and higher coupon income helped offset spread volatility, reinforcing high yield's role as a shock absorber. Recent outperformance from energy-related high yield and emerging market debt underscores the benefits of a diversified global fixed income allocation, particularly when traditional core rate exposures face headwinds. Overall, we see recent volatility in AI not as a systemic crisis, but as an opportunity for an active investment approach, while in the broad market we favour carry and selectivity over broad directional bets.
CHART OF THE MONTH:
Typical cashflow and deleveraging of a data centre
Source: Allianz Global Investors, August 2026. For illustrative purposes only.
Recent weakness in hyperscaler bonds and stocks has been driven more by concerns over outsized AI-related capital expenditure and long-term return on investment than by deterioration in creditworthiness. We remain positive on data centre credit exposure tied to contracted hyperscaler demand through 2026-2027, favouring select data centre investments over direct exposure to hyperscaler balance sheets. We like large, diversified, investment-grade data centre operators with assets in major metropolitan markets, and select high yield data centre projects fully leased to leading hyperscalers under long-term contracts. This approach offers more certainty of future revenues as capacity is already committed by tenants, construction spending is completed before operating cash flows commence, and cash generation can be directed toward deleveraging.
FIXED INCOME FORWARD | WHAT TO WATCH
- Japanese yen In August the Japanese yen weakened again against the US dollar, losing around half of its recent rally following the intervention by Japan and the US to prop it up from a four-decade low. Depreciation pressures are likely to return due to the interest-rate differential with the US and concerns over Japan’s fiscal outlook. As a major funding currency, sharp moves in the yen risk destabilising broader currency markets.
- Jackson Hole Federal Reserve Chair Kevin Warsh may face increasing pressure after yields rose following last month's minimalist communication around leaving rates unchanged. There is no policy meeting scheduled in August but fresh inflation data is still slated for release. Warsh’s next opportunity to set the record straight will be the international gathering of central bankers hosted every August in Jackson Hole, Wyoming.
- Hormuz Strait The most recent statements from the US and Iran do not point to an imminent reopening of the Strait of Hormuz, dashing expectations of a deal any time soon. While energy markets seem to be largely headline-driven, the inventory buffers that have cushioned markets so far are thinning out globally, potentially skewing risks to the upside for oil prices.
FIXED INCOME MARKET PERFORMANCE
Source: Bloomberg, ICE BofA and JP Morgan indices; Allianz Global Investors, data as at 7 August 2026. Index returns in USD-hedged except for Euro indices (in EUR). Asian and emerging-market indices represent USD denominated bonds. Yield-to-worst adjusts down the yield-to-maturity for corporate bonds which can be “called away” (redeemed optionally at predetermined times before their maturity date). Effective duration also takes into account the effect of these “call options”. The information above is provided for illustrative purposes only, it should not be considered a recommendation to purchase or sell any particular security or strategy or as investment advice. Past performance, or any prediction, projection or forecast, is not indicative of future performance. Index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index.
1 Source: Bloomberg, August 2026.
2 Diversification does not guarantee a profit or protect against losses.
