Fidelity's Durance Avoids AI-Related Bonds Citing Valuation Risk Amid Sector Surge

The Quick Take

• Fidelity fund manager Steve Durance is avoiding bonds issued by AI-linked companies, citing valuations that no longer adequately compensate for credit risk
• The caution signals growing institutional concern that AI bond market pricing has been driven by sentiment rather than fundamental credit analysis
• Durance's position highlights the emerging credit risk debate within the AI infrastructure financing boom

Fidelity fixed income fund manager Steve Durance is steering clear of bonds issued by companies with AI-linked business models or heavy AI capital expenditure, according to reports citing his concerns about stretched valuations. The position reflects a growing divide in institutional fixed income circles between investors who view AI companies' strong equity narratives as sufficient credit rationale and those who apply traditional credit metrics — free cash flow coverage, leverage ratios, interest coverage — to AI sector debt.

AI-adjacent bond issuance has accelerated significantly in 2026, as data center developers, hyperscaler infrastructure companies, and AI application companies have tapped bond markets to finance capital-intensive AI buildouts. The credit premiums on many of these bonds have compressed as equity investors' enthusiasm for AI has extended into fixed income, creating spreads that Durance and other traditional credit managers see as inadequate given the sector's execution risk profile.

Investors in corporate bond funds with AI sector exposure should assess their managers' credit frameworks for evaluating AI company debt. The key credit risk in AI infrastructure bonds is execution timing: if hyperscalers moderate capex ahead of contract revenue materializing, data center operators and GPU infrastructure companies could face covenant pressure. Monitoring corporate bond spread movements for AI-linked issuers against the broader investment grade index is the clearest indicator of whether Durance's caution is gaining institutional traction.

Synthesized from 1 source.