Credit markets entered the year from a position of strength, with rich valuations after spreads tested historically tight levels. At that point, the primary concern was the combination of elevated supply and limited spread compensation relative to previous years. Since then, the backdrop has become somewhat more complex as additional uncertainties have emerged, including geopolitical tensions, trade-related risks tied to United States-Mexico-Canada Agreement (USMCA) negotiations, private credit concerns, and the evolving implications of artificial intelligence (AI) across the corporate landscape.

Despite these factors, fundamentals in the investment-grade market remain broadly healthy. Corporate balance sheets are generally strong, and companies continue to maintain reliable access to capital markets. At the same time, demand technicals remain supportive, as maturity and coupon reinvestment flows over the next one to two years are expected to absorb a significant portion of gross supply. Outside of a material inflation shock, the most likely outcome for credit markets is therefore one of gradual spread decompression and greater differentiation across issuers rather than a broad-based widening.

What has become increasingly evident, however, is that the current environment is less about broad market direction and more about differentiation across issuers. Dispersion across sectors and credits has gradually increased, reflecting the fact that not all companies face the same macro and structural forces. As a result, the market has increasingly become a credit picker market where detailed issuer-level analysis and relative value across sectors play a critical role in assessing opportunities and risks.

One of the structural forces contributing to this evolving landscape is the rapid development of artificial intelligence. The expansion of AI is influencing credit markets in several ways, from driving new investment cycles to creating potential disruption across industries. In recent months, spreads within parts of the technology sector, particularly among companies involved in AI infrastructure, have widened by roughly 20 to 25 basis points¹. This repricing has been driven in part by investor concerns around the scale of capital expenditures required to support AI infrastructure and the uncertain timeline for monetizing those investments.

From a credit perspective, assessing the impact of AI requires looking at both the investment and disruption dynamics it creates. On one hand, the significant buildout of AI and cloud infrastructure is leading many technology companies to increase capital expenditures and, in some cases, debt issuance. While this can temporarily pressure free cash flow, the key consideration from a credit standpoint is whether companies maintain sufficient balance sheet flexibility to support these investments over time. On the other hand, AI also has the potential to reshape competitive dynamics across industries. Certain business models, particularly those with lower barriers to entry, may face pressure as automation and AI-driven solutions evolve, creating uneven impacts across issuers and sectors.

Beyond issuer-level considerations, the broader buildout of AI infrastructure is also generating second-order effects across the credit ecosystem. Investment in areas such as data centers, cloud services, and related technology infrastructure is supporting parts of the supply chain while also increasing dispersion within sectors exposed to disruption. In Canada, the direct impact is somewhat more limited given the smaller presence of large technology issuers in the investment-grade market, although certain industries, such as utilities, may benefit indirectly from rising electricity demand linked to data center expansion and broader electrification trends. As a result, security selection becomes particularly important, as the implications of AI can vary significantly across issuers and credit quality tiers.

At the index level, spreads within investment-grade technology have remained relatively stable, but dispersion beneath the surface has been increasing. This trend is particularly visible in lower-quality segments of the credit market, including high yield, certain software and services companies, and parts of the private credit space, where exposure to highly leveraged borrowers may amplify the impact of technological disruption. As a result, the sector is no longer a “buy everything” market. Instead, it has increasingly become a credit picker market where detailed issuer-level research is essential to identifying both risks and opportunities

Looking ahead, several risks remain closely monitored as potential catalysts for broader spread movements. Geopolitical developments remain an important consideration, as a prolonged conflict in the Middle East or broader escalation could keep commodity prices elevated and increase market volatility. Trade-related uncertainty also remains a factor, particularly if tensions in U.S.–Canada trade relations were to intensify. In addition, refinancing risks in lower-quality segments of the market continue to draw attention, as highly leveraged borrowers may face greater challenges if financial conditions tighten further.

Even with these risks in mind, investor appetite for high-quality corporate debt remains strong. Large technology issuers have attracted significant investor attention as market participants seek relatively stable yields, and strong credit profiles. In this environment, the growing dispersion across sectors and issuers reinforces the importance of rigorous credit analysis and disciplined issuer selection. At TD Asset Management Inc., these dynamics underscore the value of our strong and independent credit research capabilities, which allows our investment teams to assess evolving risks, and navigate the structural changes shaping today's credit market.

 ¹Source: Bloomberg Finance, L.P. As of March 16, 2026.