AI Bubble? The Real Danger Is Tight Credit Spreads

The question of the moment in markets is whether we are in an AI bubble, as stocks seem awfully expensive amid hopes that artificial intelligence will transform the economy. But there is another curiosity that is far more concerning: low credit spreads. That suggests a low-risk environment — which describes precisely nothing about this market.

The credit spread is a measure of the difference in yield between high- and low-risk bonds. Risky debt is normally low-rated corporate or emerging-market bonds. Both tend to trade at a much higher rate because there is a higher risk of default or future volatility. And yet spreads on risky corporate debt are low by historic standards.