AI Sparks Bond Selloff in Software Sector

The bond market is showing a pronounced downturn for software companies as artificial intelligence innovations rapidly advance, potentially disrupting their core business models. This shift has led to significant price drops in the debt of firms such as Rackspace Technology Global Inc., McAfee, and ION Platform Investment Group. ION Platform's euro-denominated bonds experienced their steepest decline on record recently, with dollar notes reaching their lowest since issuance.

Rackspace's first-lien bond due in 2028 has seen a notable decrease in value, trading at 25 cents on the dollar. This market reaction is driven by ongoing AI developments, including Google's planned AI assistant and funding for AI startups, which fuel concerns about AI displacing traditional enterprise software solutions and triggering a global selloff.

Market analysts note a compression in software company valuations due to uncertainty about their ability to maintain pricing power and growth in an AI-centric environment. Bonds from CDK Global, a provider for the auto sector, and cybersecurity firm McAfee have also weakened considerably.

However, some perspectives suggest these AI-related fears might be excessive. Analysts point out that large platforms with sophisticated workflows and proprietary data are more likely to leverage AI for automation and benefit from it. Despite this, recent reports, like one from EY-Parthenon on UK firms, indicate that software and computer services companies have issued a high number of earnings warnings.