The FOMO-Driven Risks in Credit and AI Markets: Why a Strategic Shift to Real Assets Is Urgent

The global financial landscape in 2025 is defined by a paradox: while corporate bond spreads and AI valuations have reached historically fragile levels, real assets remain undervalued despite their proven resilience in inflationary and volatile environments. This divergence demands a strategic rebalancing of portfolios, prioritizing tangible assets over speculative bets in credit and technology.

Corporate Bond Spreads: A House of Cards Built on Compressed Risk Premiums

From 2023 to 2024, U.S. corporate bond spreads tightened to multi-decade lows, with investment-grade spreads averaging 83–112 basis points and high-yield spreads hovering between 264–393 basis points. These levels, historically associated with periods of extreme optimism, masked a critical flaw: investors were pricing in AI-driven productivity gains and risk-on sentiment while ignoring deteriorating fiscal fundamentals. By early 2025, however, the illusion unraveled. Tariff announcements and macroeconomic jitters triggered a 37% widening in high-yield spreads (to 461 basis points) and a 15% widening in investment-grade spreads.

The fragility of this environment is compounded by a $642 billion corporate debt refinancing wave in 2025 alone. Despite Federal Reserve rate cuts, firms face refinancing costs 1–2 percentage points higher than pre-2023 levels. This creates a self-reinforcing cycle: higher borrowing costs weaken corporate earnings, which in turn pressure credit ratings and trigger further spread widening. The Bloomberg U.S. Aggregate Bond Index, once a safe haven, now offers yields outperforming 3-month Treasury bills—a sign of desperation rather than strength.

AI Euphoria: A Bubble Built on Data and Dreams

The AI sector's valuation surge—from $279 billion in 2024 to $390 billion in 2025—has been fueled by speculative FOMO. Software and services segments dominate, with deep learning and generative AI driving 35% of global revenue. Yet this growth is underpinned by systemic risks:
- Data Dependency: AI models rely on historical datasets, which may lack relevance in a rapidly changing macroeconomic environment.
- Regulatory Lag: Governments are scrambling to address AI's ethical and operational risks, from biased algorithms to cybersecurity vulnerabilities.
- Operational Fragility: AI-as-a-Service (AIaaS) platforms, while convenient, create single points of failure. A disruption at a key provider could paralyze financial markets.

The Bank of England's Financial Policy Committee (FPC) has warned that AI's role in credit underwriting and algorithmic trading could amplify systemic risks. For instance, correlated AI-driven trading strategies could exacerbate liquidity crunches, while flawed credit models might misprice risk for small and medium-sized enterprises (SMEs).

Real Assets: The Overlooked Pillars of Stability

Amid this fragility, real assets—real estate, commodities, infrastructure, and natural resources—offer a compelling alternative. These assets inherently hedge against inflation and macroeconomic shocks, with historical correlations to equities and bonds averaging 0.3–0.5. Key advantages include:
1. Inflation Protection: Unlike bonds, real assets appreciate in value during inflationary periods. For example, industrial real estate and farmland have outperformed equities by 4–6% annually since 2020.
2. Diversification: Real assets' low correlation to traditional markets reduces portfolio volatility. During the 2020 liquidity crisis, real estate investment trusts (REITs) held up better than 70% of S&P 500 sectors.
3. Undervaluation: Despite their merits, real assets remain undervalued. The MSCI Global Real Estate Index trades at a 20% discount to its 10-year average, while gold and copper prices are near multi-year lows relative to GDP.

Strategic Recommendations: Rebalancing for Resilience

Investors must act decisively to mitigate exposure to fragile credit and AI markets:
1. Reduce Overweight in High-Yield and AI-Driven Sectors: Trim allocations to speculative tech stocks and high-yield bonds, which now trade at valuations 30–40% above fair value.
2. Increase Exposure to Real Assets: Allocate 20–30% of portfolios to inflation-linked assets like REITs, commodities, and infrastructure ETFs. For example, the iShares Global Infrastructure ETF (PSP) offers diversified exposure to toll roads, utilities, and airports.
3. Leverage Floating-Rate Instruments: In the corporate bond space, prioritize floating-rate notes (e.g., VanEck IG Floating Rate ETF) to hedge against interest rate volatility.
4. Adopt Active Credit Selection: For those retaining corporate bonds, focus on high-quality issuers with strong balance sheets and low leverage. Avoid “fallen angel” bonds unless they offer a 500+ basis point yield premium.

Conclusion: A New Paradigm for Portfolio Construction

The 2023–2025 period has exposed the limits of traditional asset allocation. Compressed corporate bond spreads and AI euphoria reflect a market chasing yield without adequately pricing in risk. Real assets, by contrast, offer a path to stability in an era of fiscal uncertainty and technological disruption. For investors seeking to preserve capital and generate real returns, the time to rebalance is now.