Growing doubts over the pace of AI spending are restoring government debt’s defensive appeal, while rising issuance threatens to push up the cost of holding longer-dated bonds.
A wobble in enthusiasm for artificial intelligence has helped revive demand for bonds as investors reassess the durability of the market’s most crowded trade, according to Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management. Dowding said the recent pullback in technology shares has restored a more familiar relationship between equities and government debt, with investors once again treating fixed income as a defensive refuge.
That shift has come as markets question whether the AI boom is beginning to lose some of its momentum. Dowding pointed to signs that spending on AI may be moving from the earlier phase of rapid expansion into something more restrained, with some businesses appearing to ration usage after an initial burst of enthusiasm. He said that does not mean the build-out has ended, but it may indicate that the pace of quarter-on-quarter acceleration is easing.
The change matters because many technology shares are priced as long-duration assets, meaning their valuations depend heavily on earnings expected far into the future. When those expectations are challenged, bond markets can regain appeal. Dowding suggested that a more modest, though still healthy, growth path for the US economy could emerge if AI spending normalises and companies outside the sector continue to feel the pressure of higher rates.
On inflation and monetary policy, Dowding argued that recent US price data has not been strong enough to force the Federal Reserve into immediate action. He said discussions in Washington reinforced the view that the next rate increase is more likely in December than later this month. Even so, he expects inflation to peak near 4% early next year before gradually easing, which would leave the Fed on hold later in 2027 after additional tightening in the fourth quarter of this year and the first quarter of next year.
Dowding also sounded cautious on longer-dated government bonds, saying rising debt issuance in the US and abroad could push investors to demand a larger term premium for holding longer maturities. With yield curves still relatively flat on both sides of the Atlantic, he sees scope for steeper curves ahead. Outside the US, he noted that European sovereign bonds have steadied, Japanese government debt has benefited from domestic buying and the dollar has lost some of its recent upward momentum as technology shares have softened.
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