Toronto [Canada], October 29 (ANI): The US credit outlook is expected to remain broadly benign despite tighter funding conditions. However, higher interest rates and increased borrowing to finance artificial intelligence investments could put pressure on lower-rated borrowers and sectors sensitive to interest rate changes, Fitch Ratings said.

"Higher-for-longer interest rates and rising AI-related funding needs will test interest-sensitive and lower-rated U.S. borrowers, but Fitch Ratings expects the overall credit outlook to remain broadly benign," the ratings agency said.

Fitch raised its US economic growth forecasts for 2026 and 2027 by 0.2 percentage point each to 2.1 per cent, supported by resilient consumer spending and AI-driven private investment. It expects fixed investment to grow 4.8 per cent in 2026 and 4.6 per cent in 2027.

However, Fitch expects the Federal Reserve to raise interest rates to 4.25 per cent in December and maintain that level through 2027, sustaining pressure on borrowers refinancing debt at higher costs.

The Fed's latest policy decision, announced on Wednesday, was to hold its benchmark interest rate at 3.75-4 per cent as policymakers continued to assess persistently elevated inflation.

Funding conditions are also being shaped by substantial US Treasury supply and rising corporate borrowing by large technology companies to finance AI-related capital expenditure. US fixed-income issuance rose 10.4 per cent year-on-year in the first nine months of 2026, while corporate bond issuance increased 24.5 per cent.

Although investment-grade bond spreads remain near multi-year lows, yields on CCC-rated debt have widened by around 480 basis points since the start of the year.

AI investment remains both a major growth driver and a potential source of financial risk. IT-related private investment grew around 18 per cent year-on-year in the second quarter of 2026, but Fitch warned that intensifying competition and cheaper open-weight AI models could weaken pricing power among AI service providers and lead companies to reassess capital expenditure plans over the next one to three years.

Fitch's adverse AI equity-correction scenario would result in a US recession, with gross domestic product declining 0.6 per cent in 2027.

The agency also highlighted mounting pressure on some borrowers. Its US private-credit default rate reached a record 6.3 per cent in the 12 months through September 2026, while leveraged-loan defaults are expected to rise towards the lower end of its 4.5-5 per cent year-end forecast range.

Fitch's outlook suggests that while the broader US credit market remains resilient, borrowers facing higher refinancing costs and sectors dependent on continued AI investment could face greater pressure in the coming months. (ANI)