Fixed income markets may be enjoying the calm of tight spreads and stable
headline employment, but Richard Quin, chief investment officer at Bentham Asset Management, says the world is increasingly defined by a “K-shaped economy”, where the winners and losers are diverging sharply across consumers, corporates and labour markets.
“We have a problem of haves and have nots in the consumer and the corporates,” he says. “The upper part of the K is doing very well.”
He points to the growing concentration of spending power, with the top 10% of income earners now controlling close to half of consumer expenditure – a marked shift from the 1990s. At the same time, large, capital-rich companies are harnessing artificial intelligence to expand margins, while smaller and mid-cap firms are becoming trapped by higher servicing costs and weaker productivity.
“AI is rewriting the script in real time,” Quin says.
“AI productivity comes with labour displacement. While markets have celebrated AI’s productivity upside, the more pressing risk lies in what is being destroyed in the process. AI gives us productivity, but it eats employees or consumers,” he says.
Global institutions including the IMF and the World Economic Forum have warned the world is undergoing the greatest labour reshuffle in a century, with disruption increasingly hitting higher-paid professional roles rather than just manual work.
“The risk will be in the next two to three years and could be quite dramatic,” Quin says.
For Bentham, that means looking beyond aggregate employment data, which can obscure deeper churn in the workforce.
“Stepping stone roles are disappearing,” Quin says. “AI may be removing the ladder on the career board for young graduates.”
Quin believes AI is creating a new kind of structural credit risk, what he calls the “Schumpeterian credit gap”.
“Drawing on economist Joseph Schumpeter’s idea of ‘creative destruction,’ innovation may create long-term economic value, but it can be brutal for bond holders. For a credit investor, it can be an engine of defaults,” he says.
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The speed of AI-driven change is outpacing the ability of legacy companies to amortise debt, raising the risk of permanent capital loss rather than temporary earnings weakness.
“If investors are exposed to companies being AI disrupted, you aren’t just facing a bad quarter,” Quin warns. “You may be facing permanent capital loss.”
In this environment, credit analysis is no longer only about cashflow coverage but about future relevance.
“Credit risk isn’t just about the ability to pay,” Quin says. “It’s about the ability to still matter in the future.”
Beyond AI, Quin is cautious on credit valuations, particularly given tight spreads and underpriced leverage.
“Be concerned about LICE: highly levered transactions, low interest coverage, and companies with low earnings,” he says.
He notes the investment-grade universe has deteriorated structurally, with a much larger share of BBB-rated issuers than in previous cycles.
“The downgrade risk on BBBs is still there,” Quin says, “especially if AI disruption makes this a far less ‘normal’ cycle than markets are pricing.”
In Australia, the market is now pricing in at least two rate hikes this year.
“I think this will slow down the Australian economy a little bit.
“We think most of the return is in the interest rate right now. We were able to decrease our risk in interest rates and then increased our risk towards the end of the year post the sell-off in rates in Australia, switching out of other markets back into the Australian market.
“We also believe that the Australian dollar is an alternative for investors holding a high-quality government bond that doesn’t have a deficit out of control and is a potential reserve currency. I see problems with it too, because it’s a cyclical currency and a commodity-based currency. But, again, there are changes that we’re seeing here that are unusual.”
Against this backdrop, Bentham has positioned its multi-sector portfolios, including the Global Income Fund, defensively.
“We have decreased our credit risk and gone up the credit curve. We have increased exposure to government bonds and higher-quality securities, believing most of the return opportunity is now in rates rather than spreads.
“We think most of the return is in the interest rate right now,” Quin says.
The firm has also rotated back into Australian duration following the sell-off in domestic rates.
“We like the fixed-interest yield right now. We think it’s good protection for investors.”
“The asymmetric profile of high-quality duration — positive carry, negative correlation to equities, and real yield support — makes it compelling in a world where equity valuations remain elevated.
“If investors are worried about a reversal in equities, you get some benefit out of having treasuries,” he says.
On credit, Bentham remains selective, generating exposure more through semi-government and higher-quality spread sectors rather than expensive corporate risk.
“We think corporate credit is reasonably expensive right now. Floating rate and capital securities still offer value. While cautious on traditional credit beta, we continue to favour loans for their carry, even as spreads compress, and sees value in capital securities relative to local hybrids. We think it’s much better value than the local hybrid markets.”
