DATA CENTER WATCH
Microsoft presses Trump to scuttle ban on Chinese data center tech
Microsoft and other companies and trade groups have pressed the Trump administration to halt plans to bar imports from China of a key component used in AI data centers, three people familiar with the situation said.
Reuters reported in August that the Trump administration wants to ban US imports of new models of Chinese optical transceivers, which allow data to travel over fiber-optic cables at the speed of light within data centers. The concern is that they could be used by Beijing to steal data, install malware or disrupt service at US data centers.
Microsoft has 35 data centers under construction in the US and another 134 planned, according to Cleanview, a market intelligence company which tracks data center development. It is one of a group of companies and trade groups making the case to the Trump administration that such a ban could irreparably damage the US edge over China in the AI race by further slowing the data center rollout, the sources said. (…)
“It really threatens to arguably grind (the data center rollout) to a halt,” said John Miller, Executive Vice President of Policy and General Counsel of the Information Technology Industry Council (ITI), a tech lobbying group, which has publicly urged the administration not to move forward with a ban.
He said many cloud companies have already purchased the AI chips needed for the buildout. “Those chips, without optical transceivers literally could just sit there waiting around un-utilized until you actually have the transceivers to essentially connect them together,” he added.
Some data centers need millions of optical transceivers to connect servers, routers and switches.
The Federal Communications Commission, which oversees the US telecom industry, is working on the ban. (…)
Beijing “firmly opposes the U.S. overstretching the concept of national security and abusing state power to unjustifiably suppress Chinese companies,” the Chinese embassy in Washington said in a statement. “China will continue to firmly safeguard the lawful rights and interests of Chinese companies.”
China boasts two-thirds of the global market for optical transceivers, according to Counterpoint Research. Chinese firms like Eoptolink and Zhongji Innolight, which was added to the Pentagon’s list of Chinese military-backed companies, dominate global supply, counting top American hyperscalers among their customers.
US-based Coherent and Lumentum produce technology that competes with them but lack the scale to replace Chinese vendors, according to a report by the Foundation for American Innovation.
“A Pentagon-listed Chinese military company, including Zhongji Innolight, should not be wiring America’s data centers,” the House Select Committee on China, led by Republican John Moolenaar, said in a social media post following the report. The FCC should “move forward and keep new (China)-linked optical transceivers out of our networks,” the committee added.
ITI sent a letter to the FCC on August 13 calling on the telecoms watchdog to “refrain from adding optical transceivers” to a trade blacklist, emphasizing the “potential effects that supply disruptions could have on data center deployment and US AI leadership.”
Morgan Stanley said in an October client note that the Trump administration was considering barring Chinese optical transceivers capable of handling 3.2 terabits of data per second, whose production is not expected to ramp up until 2028, with widespread installation expected in 2029.
Such a threshold could avoid antagonizing US companies and Beijing while giving US optical companies time to expand production.
The FCC has not addressed the optical transceiver issue publicly, but two of the sources said the 3.2 terabit per second threshold is under consideration.
Lawmakers may not want to wait. In September, a bipartisan group of US lawmakers introduced legislation to bar the federal government from equipping sensitive government systems with Chinese-made optical transceivers.
(JP Morgan Asset Management)
AI Boom Helps Fuel China Exports, Pushing Trade Surplus Above $1 Trillion
Through the first 10 months of the year, China’s surplus is nearly 9% larger than it was during the same period of 2025, when it posted a record $1.2 trillion (…).
Chips and computer parts accounted for 40% of the year-on-year increase in Chinese export value so far, reflecting soaring prices as a result of a building frenzy around data centers.
In volume terms, growth came from a broad range of high-tech products, ranging from the “New Three” sectors promoted by China’s leadership — solar panels, electric vehicles and batteries — to industrial robots, according to a Goldman Sachs analysis.
Other signs emerged today that the AI boom is continuing to fuel exports from Asia. TSMC, the Taiwanese chipmaker that’s an important supplier to companies like Nvidia and Apple, posted a 60% increase in monthly sales. (…)
The main suppliers of AI-related goods are emerging markets, with Taiwan, Mexico, Vietnam and Thailand accounting for more than 80% of US imports of AI-related products, according to a report this week from Oxford Economics. (…)
Meanwhile, US officials in Washington are voicing concerns again over Beijing’s curbs on a different group of key exports — critical minerals. Those restrictions and added bureaucracy are limiting the availability of products used in everything from aerospace and defense to semiconductors and magnets for electric vehicles. (…)
Prices are reflecting the scarcity of some strategic minerals outside China. Yttrium, used in electronics and turbines, is a staggering 125 times more expensive in Europe than in China, according to price reporting agency Argus Media.
A ton of the metal costs about $1.15 million compared with just $9,144 in China, where supplies remain ample.
China’s total exports of yttrium oxide are running at about two-fifths of the average level for 2023-2024. Almost none has been exported to Japan this year, and shipments to the US are about 70% lower than before 2025.
CAPITAL IS CAPITAL
Foreign demand for US Treasury auctions sees biggest drop since 2016 in benchmark 10-year
A day after Monday’s 3-year Treasury auction tailed (yield above expectations), today’s benchmark $42 billion 10-year sale sees biggest tail since February, as indirect bidders (which include foreign buyers) posted their biggest drop since 2016. (…)
The 5% coupon is the highest since 2006, per ZeroHedge.
Bid-to-cover: 2.46, lowest since May, vs. 2.77 in October and a 2.60 six-month average. (…)
ZeroHedge called it “downright ugly,” with foreign buyers staging “a bit of a strike.” (…)
Oaktree Capital’s Howard Marks writes (my emphasis):
AI-related debt issuance has totaled nearly $600 billion globally so far this year, according to Goldman Sachs, comprising debt issued by the hyperscalers, in data-center/project financings, and by other AI-linked borrowers. Around $400 billion of this went to the U.S. investment grade debt market, representing over one-fifth of total IG supply and taking the share of AI-related bonds in the Bloomberg USD IG Corporate index to around 12%.
For the U.S. high yield bond market – into which the hyperscalers don’t directly issue – the weighting is more like 6%.
Clearly, AI-related debt issuance is one of this year’s major capital-market developments.
Going forward, AI seems likely to require an average of $1 trillion of new capital per year in the period ahead, and hundreds of billions of that are likely to continue to be raised each year through the issuance of debt. What will be the impact on interest rates of AI’s demand for debt capital?
Since expanding capacity and developing new products are imperatives for the hyperscalers and frontier labs – and since they don’t want to see competition crop up – these companies likely can’t afford to slow their investment in AI just because interest rates may be higher than they expected. That means they have to be “takers” of financing, even if it is in short supply and increases in cost.
In the past, economists used to talk about “crowding out,” in which aggressive government borrowing makes it hard for the private sector to find the debt capital it needs. At present, it feels to me that the demand for debt from rate-insensitive hyperscalers willing to pay whatever it takes has the potential to elevate the interest rates the government must pay. Hasn’t that contributed to the rate rise we’ve seen to date?
In the same vein, will the equity markets be capable of providing the hundreds of billions of new equity investment required each year, supplementing the companies’ cash flow? The amount raised in traditional U.S. IPOs was below $50 billion in eight of the last ten years (the exceptions being almost $80 billion in 2020 and $140 billion in the boom year of 2021).
I suspect there’s just so much new capital available in a given year; won’t AI’s appetites for both debt and equity ultimately compete against each other for it?
In the past, the highly profitable non-AI businesses of the hyperscalers produced massive free cash flow that rendered them debt-free, cash-rich, and highly rated. Things are different now, and these companies are spending their cash hoards and current cash flow, and they’re borrowing more. Their strong investment-grade ratings enable them to easily finance their expansion in AI.
But as this process wears on, might their creditworthiness and/or ratings change? What are the possible implications for those who lend against the high ratings today and watch as the companies increase their leverage?
Some of the data-center financing taking place is facilitated by the investment-grade ratings of the hyperscaler tenants. Other debt is collateralized by chips. But investors have to be very conscious of “out clauses” in some data-center leases that can enable tenants or guarantors to terminate their obligation under certain conditions – such as the failure of the center to operate at 99.9% reliability – and of the potential risk that collateral in the form of chips won’t last as long as the debt.
What are the implications of the industry’s so-called “circular transactions,” in which companies finance purchases of their products? We see frequent instances of lending and related buying between chipmakers, hyperscalers, frontier labs, and data-center builders. Sometimes money goes from A to B and back to A. Sometimes it goes from A to B, and then to financing for C, which spends it with A.
Are these transactions the parties would enter into on an arm’s length basis, or are vendors subsidizing buyers to support demand and protect market share for their products? What are the risks associated with this interdependence?
And what is the impact on the hyperscalers’ creditworthiness of borrowing on the part of special-purpose vehicles that keep debt off balance sheets – is the parent behind the debt or isn’t it?
Finally, what are the effects of borrowing in a time of exuberance surrounding an exciting technological advance? In the end, we have the confluence of several factors:
- a massive desire to borrow on the part of AI companies,
- investor excitement surrounding AI, and thus a willingness to lend,
- heavy concentration on AI in the capital markets, as described above, and
- so-called “circular transactions” between participants in the AI industry.
Lenders to AI face a new era, marked by debt concentrated in a single industry, rapid change in industry fundamentals, and a high degree of reliance on the level of future revenues from sales of compute. Lenders will have to be exceptionally vigilant regarding the creditworthiness of the borrowers they back and the structure/terms through which they do it.
Howard then wonders if AI is a bubble:
First, we need a definition of a bubble, and I want to supply mine: irrational exuberance leading to imprudent behavior, excessive investment, and too-high prices for participation. I think an AI bubble, like any possible bubble surrounding a technological advance, has to be considered in at least three ways.
- Is the technology itself overhyped and likely to disappoint?
- Are the amounts companies are spending excessive and fated to produce inadequate returns?
- And are investors taking too much risk and paying too much for stakes in this field?
I still think AI itself will prove powerful and consequential and change corporations, the economy, and life speaking broadly in ways we can’t even imagine. So no, the technology isn’t an illusion.
A great deal of discussion is taking place regarding the revenues that will have to be generated in the future to justify the capital expenditures. But until we know something about how AI will be used and who will profit, we can’t assess the wisdom of the companies’ spending.
And until knowledge of these things enables us to reasonably estimate the companies’ earnings and the profitability of the infrastructure, we can’t judge the appropriateness of the prices being paid for stocks or the yields being offered on debt.(…) the key boils down to this rather complex one: will AI provide sufficient value to users to warrant sales of compute and prices for compute high enough to result in adequate returns on the trillions of dollars being invested in it (and for which companies)?
The conclusion I draw from my conversations with people I consider knowledgeable is that, at this point, answering this question is largely a matter of faith.
That reminds me of a quote attributed to American economist and writer Stuart Chase:
For those who believe, no proof is necessary. For those who don’t believe, no proof is possible.
Try as I may, I can’t come up with a more appropriate resolution to the questions surrounding AI than this.
(JP Morgan Asset Management)
From Menlo Ventures:
More Money Goes into Using AI Than Building It
For every $1 the industry spends building AI models, enterprises spend about $1.70 putting them to work. As of September 2026, we estimate $176.8B in enterprise spending on using AI (up 5.4x) versus $102.5B on building models (up 5.3x).
That demand underwrites the buildout. We estimate that Anthropic and OpenAI alone account for 25%+ of AWS, Azure, and Google Cloud revenue, with much of that spend going to training. That investment only pays off if enterprises keep putting models to work, which agents are now driving. (…)
Open-source usage is rising and, in recent weeks, Anthropic and OpenAI have started discounting even their flagship models. The result is sharper competition at every intelligence tier, but our data show buyers continue to prioritize
capability over cost in model selection.• Frontier models are gaining share. Frontier models more than doubled their share of tokens, from 18% to 42%, outpacing even open-source growth. Their share of spending also climbed, from 35% to 63%.
• Buyers are trading up from less expensive models. A year ago, the most popular models were Claude Sonnet 4.5 ($3 per million input tokens/$15 per million output tokens) and GPT-5 ($1.25/$10). Today, they are Claude Opus
5.5 ($4/$20) and GPT-6 Astra ($10/$60). The mix shift has kept most of the value with the most capable models, even as individual model families are discounted.AI Spend Concentrates Where Agents Work Best
The total AI application market is now $77.3B, up from $19B last year. But just two markets account for 76% of all app spend: coding ($34.0B, up 7.7x) and enterprise chatbots ($25.0B, up 3.0x). To put that in perspective, healthcare—one of the world’s largest industries—ranks a distant third at just $3.7B.
Agents Are the Biggest New Consumers of Infrastructure
AI agents are becoming the standard way to build AI applications. Today, 74% of builders use agents to manage workflows and execute tasks, compared with 27% of startup deployments in 2025. Nearly a third (32%) are already using multiple agents working together.
This shift is reshaping infrastructure demand. Traditional software infrastructure was built primarily for applications used by people—human-paced, one session at a time, provisioned once and left running. Agents operate differently:
They work at machine speed, run in parallel, spinning up and discarding resources as needed.
Time To Sound The All Clear Signal?
(…) Our [Ed Yardeni] worry list is getting shorter:
(1) Geopolitics. The feared post-midterm re-escalation of the Middle East war did not materialize. Instead, President Donald Trump adopted a more conciliatory tone after Republican election losses, which some Republicans partly blamed on the unpopular war. Correspondingly, oil prices have retreated recently. The White House now seems determined to maintain the status quo by continuing to blockade Iran, while seeking a diplomatic solution.
(2) Bond yield. The 10-year Treasury yield is back in our old normal range of 4.00%-5.00%. We view this range as consistent with solid economic growth. It rebounded to the top of the range yesterday after October’s hotter-than-expected CPI, which increased the odds of a 25bps Fed rate hike early next month. We’ve expected a 50bps hike ever since the last FOMC meeting, which voted against another hike.
(3) Domestic policies. The midterms are done, removing one key source of uncertainty. The market’s recent rebound suggests investors are adjusting to the new political landscape, though fiscal standoffs over the federal budget and debt ceiling remain a risk. In our opinion, the Blue Wave in Congress and state governorships might slow data center construction, but it won’t stop the AI buildout.
(4) AI investment boom. Investors seem to be coming around to our view that financial, political, and physical constraints should be speed bumps, not roadblocks, to the AI buildout. That’s principally because demand for computing power remains exceptionally strong. CoreWeave’s earnings report yesterday provides further evidence, with Q3 revenue surging 168% y/y to $3.7 billion and backlog reaching $132.5 billion. Such robust demand not only justifies continued investment in computing capacity but also helps ease financing concerns. Indeed, the company expects roughly $9 billion in customer prepayments and deposits, reducing its reliance on expensive borrowing.
But is this exceptionally strong demand for computing power sustainable? The latest results from OpenAI and Anthropic suggest that it is. OpenAI’s Q3 revenue surged 160% y/y to $10 billion, while Anthropic’s soared 1,127% to almost $17 billion. This exponential revenue growth provides compelling evidence of rapidly expanding demand for AI services, which will continue to fuel compute demand. Meanwhile, reports that Anthropic’s IPO is already multiple times oversubscribed suggest that investors remain eager to finance the boom.

