Month: October 2026

AI Credit Crunch?

Ed Yardeni chimes in after my October 8 post AI Capital Crunch?

(…) Does enough capital even exist to finance everyone’s ambitious AI spending plans?

Meta’s earnings announcement on Wednesday brought these concerns to the fore. Despite revenues rising 26% y/y to $64.6 billion, the company reported negative free cash flow of $2.1 billion. It raised the lower end of its 2026 capital expenditure guidance to $135–$145 billion and announced a new class of non-voting shares to facilitate future capital raising. Investors interpreted the move as a sign that even hyperscalers may be rushing to secure financing before competitors absorb the available capital.

Indeed, the Meta report stated: “Recent significant capital raises from peers like Alphabet and SpaceX, alongside anticipated fundraising from Anthropic and OpenAI, have created an increasingly challenging fundraising environment.”

Several industry leaders have confirmed this concern. Broadcom CEO Hock Tan recently warned that capital could become the biggest constraint on AI development. BlackRock CEO Larry Fink said that competition for capital was the fiercest he had witnessed in his career. On Thursday, Nvidia CEO Jensen Huang warned that neocloud demand is “off the charts” but capital is scarce.

As AI companies compete for capital, rising financing costs increase the returns required to justify investments, amplifying the original worry about whether all that spending will pay off. Today’s market action showed how these concerns are playing out across stock and bond markets:

Meta’s shares plunged 7.0% today after yesterday’s announcement, leading a broad selloff in AI-related stocks. Nvidia fell 4.4%, CoreWeave fell 10.1%, and Lam Research fell 11.8%. SOXX dropped 6.8%.

The Nasdaq dropped 2.6%, its worst day in four months. (…)

The 10-year Treasury yield fell below 5.00% for the first time in nearly a month, returning to what we consider its old-normal range of 4.00%–5.00% (chart). The Treasury market rally suggests that investors are increasingly concerned that tightening access to capital could slow the AI buildout, one of the economy’s most important growth engines. (…)

We view market-driven tightening access to capital as healthy for the AI boom, resulting in more efficient capital allocation and reducing over-investment risks.

Importantly, we expect the key players to retain financing access. The five major hyperscalers (Amazon, Alphabet, Meta, Microsoft, and Oracle) alone are projected to spend almost $780 billion in 2026. Over each of the following four years, from 2027 through 2030, that figure is expected to exceed $1 trillion annually. Their strong cash flows, balance sheets, and market access should allow them to continue investing in AI.

So, Treasury investors’ wish of an AI-led slowdown is only wishful thinking and AI financing will keep crowding out other borrowers, including the US of A.

• Scott Bessent shrugs off ‘systemic’ AI risks at closed-door investor conference

Treasury secretary Scott Bessent told investors in a private meeting that he did not see a “systemic problem” with the AI boom, downplaying concerns that the industry is in a bubble like the one that preceded the dotcom bust. (…)

“I’m good at figuring out when there are problems in systems,” Bessent, a former macro hedge fund manager, said when asked about AI in an interview with Bridgewater chief executive Nir Bar Dea, according to three people who were present at the event. 

“I don’t see a systemic problem.” (…)

Here’s where there might be a problem:

Firms rated Caa and below face $27 billion in debt maturities over the next year and $91 billion by fall 2028, the rating agency warned Tuesday.

At this time in 2025, one- and two-year figures were $23 billion and $42 billion, respectively.

That low-rated cohort now accounts for one-third of all sub investment-grade maturities next year and more than 25% of the 2028 total.  By way of context, triple-C-rated credits compose only 8.5% of the high-yield market, data from Janus Henderson show. (ADG)

Refinancing is now done at 7%+, a huge hit for borrowings made pre-2023.

Source:  Topdown Charts Research Services

Meanwhile, Ed continues:

Another development amplifying risk-off sentiment today was escalating geopolitical tensions in the Middle East. The New York Times reported that the US and Israel have developed plans for possible renewed strikes against Iran following the November 3 midterm elections.

Meanwhile, intensifying Houthi attacks on Saudi infrastructure prompted the US to order nonessential diplomatic personnel and their families to leave Saudi Arabia, while Saudi Aramco evacuated staff from its Dhahran headquarters.

The price of Brent crude oil jumped to $113.17 per barrel Thursday, while West Texas Intermediate crude rose to $103.95. (…)

Prices remain elevated partly because of higher shipping costs, but more importantly because of a geopolitical risk premium (…).

BTW: US is prepared for long stand-off with Iran, says Trump envoy

Mike Waltz, Donald Trump’s ambassador to the UN, acknowledged that a year from now the US could still be mired in a stalemate with Iran, without a deal on Tehran’s nuclear programme or a return to prewar shipping through the Strait of Hormuz. (…)

But “the president and the US Navy can maintain this blockade [on Iranian ports] for the foreseeable future,” he said, and the administration is “tightening” its economic pressure campaign. (…)

Waltz said the US will not have accomplished its strategic objectives in the conflict until it has disposed of Iran’s highly enriched nuclear material and reached a “meaningful agreement on their domestic enrichment” with Tehran. (…)

• Iran’s IRGC Navy says seven vessels hit, warns US of wider response

Iran’s Islamic Revolutionary Guard ​Corps Navy said ‌on Thursday that four vessels involved ​in illegal oil ​transfers in the northern ⁠Persian Gulf ​were simultaneously hit ​and caught fire after being tracked by its ​forces on ​Wednesday.

The IRGC added that three ‌more ⁠vessels collided with mines west of the Strait ​of Hormuz, ​and ⁠warned the US military ​that continued provocations ​could ⁠lead to a wider response ⁠against ​its regional ​bases.

There is also a Term Premium on oil prices. Back to Ed:

The bottom line is that the Middle East conflict remains a wild card. However, we expect US consumer spending and business investment to remain robust, while federal deficits of roughly 6% of GDP (during a solid economic expansion) provide additional economic stimulus.

We expect the US economy will continue to pass the latest stress tests originating in the AI ecosystem and in the Middle East.

But more than half of the 6% deficit is now interest expense. What’s the multiplier on that?

Data: Office of Management and Budget via FRED, U.S. Treasury. (2026 GDP estimated using extrapolated Q3 growth.) Chart: Emily Peck/Axios

FLASH PMIs

Eurozone: October sees softer expansion in eurozone output

• Flash Eurozone PMI Composite Output Index: 51.9 (September: 53.1). 4-month low.
• Flash Eurozone Services PMI Business Activity Index: 51.7 (September: 53.0). 2-month low.
• Flash Eurozone Manufacturing Output Index: 52.4 (September: 53.6). 4-month low.
• Flash Eurozone Manufacturing PMI: 52.4 (September: 52.9). 3-month low.

Matching the trend for business activity, new orders increased at the slowest pace in the current four-month sequence of expansion at the start of the final quarter of the year. Here, the rate of growth was only slight as both monitored sectors saw only modest improvements in new business.

While the rate of expansion in new export orders (which include intra-eurozone trade) also eased, an increase was recorded for the third consecutive month, an improved
picture following a period of amost four-and-a-half years
in which new export business had fallen continuously on a monthly basis. In fact, the latest rise in new export orders. (…)

Manufacturers efforts to secure inputs were hampered by ongoing disruption to supply chains. Supplier lead times lengthened markedly, and to the largest degree in four months.

Manufacturers reported a sharp and accelerated increase in input prices in October, often linked by respondents to higher costs for energy, fuel and transportation. The latest rise was the steepest since May and above the average for the year-to-date.

The strength of the rise in manufacturing input prices meant that input cost inflation overall quickened for the second month running despite a slower rise in services input prices.

In contrast to the trend in input costs, the rate of output price inflation slowed in October. Both Germany and France posted weaker increases in selling prices than in September, but the rest of the eurozone as a whole saw the rate of inflation accelerate.

 

Japan: Business activity rises solidly again in October

• Flash Japan Composite PMI Output Index: 52.3 (September: 52.3)
• Flash Japan Services PMI Business Activity Index: 52.0 (September: 51.3)
• Flash Japan Manufacturing PMI: 53.3 (September: 54.1)
• Flash Japan Manufacturing PMI Output Index: 53.1 (September: 54.9)

Demand conditions softened across Japan during October, with new business at the composite level rising to the smallest extent in three months. Sales growth in the service sector rose at a steeper, yet still modest pace, but goods producers recorded the slowest rise in new orders since March.

External demand conditions also remained positive, though new export business rose at the softest rate in four months.

The rate of input cost inflation across Japan’s private sector accelerated slightly in October, and was marked overall. Firms frequently mentioned that higher raw material and labour costs were sources of inflation at the start of the fourth quarter.

Companies raised their output charges sharply again in October in response, though the rate of inflation eased to a four-month low.

 

US Treasury proposes tighter rules on investing in sensitive Chinese tech Restrictions would apply to investments in areas including AI, hypersonic weapons and biotech

US companies and investors would face tighter restrictions on investing in sensitive areas in China from AI and hypersonic weapons to biotech under proposed rules unveiled by the Trump administration.

The Treasury on Thursday published regulations implementing the Comprehensive Outbound Investment National Security Act, which Congress passed in 2025 to boost scrutiny of investment in China and other adversaries including Iran and Russia to protect American national security.

The proposed regulations would impact investments in advanced chips and AI. They would also target a range of biotech-related compounds and materials and technology such as brain-computer interfaces. (…)

Craig Singleton, an expert on US-China competition at the Foundation for Defense of Democracies, said the proposed regulations for biotechnology were the most significant element of the package released by Treasury. “

Biotech matters to both Wall Street and Main Street,” he said. “It shapes the future of medicines and therapeutics, but some of the same technologies can also strengthen China’s military capabilities or deepen US dependence on Chinese supply chains.”

He added: “Treasury is putting investors on notice that money flowing into parts of China’s biotech sector carries national security consequences and will face much closer scrutiny.” (…)

The proposal sets up a lobbying fight between the administration and the US biotech sector, which has increasingly turned to China for early drug development. (…)

However, the regulations spare certain deals that US pharmaceutical companies have done in China. Eli Lilly, Pfizer, Bristol Myers Squibb and other US companies have paid billions of dollars to Chinese drugmakers to license their new medicines.

These licensing deals avoid the regulations if they were paid in cash without an equity investment, said Will Humphrey, a vice-president at Capstone, a healthcare policy and consulting firm.

China’s Petrochemicals Glut Turns to Crunch After Months of War

The actual shortages are happening now.

China has burned through much of a petrochemicals glut built up by years of overproduction as the US-Iran war chokes oil flows, setting the stage for higher prices for an array of industrial materials.

The squeeze is most acute in the so-called aromatics chain and the downstream products made from these chemicals, according to JPMorgan Chase & Co. and commodities data provider ICIS. That includes rubber for car tires and electrical insulation, resins, and plastic bottles, as well as various paints and coatings. (…)

“Right now, inventory levels are basically near the bottom,” said Parsley Ong, head of Asia energy and chemicals research at JPMorgan. The tightness in Chinese markets has already affected consumers with “inflation happening across most products,” she said.

The price rises have fed through into China’s producer price index, which tracks inflation at the wholesale level, and has gone from below zero in February to a faster-than-expected 5% in September. These price gains are also being exported, given the country’s role as a major supplier of petrochemicals and downstream products to global markets. (…)

Inflation going global

Rising inflation isn’t just a US problem. It’s happening globally, but the extent varies. This chart shows the latest CPI inflation across top countries and regions. The large European and North American economies are mostly in the 3%-4% range.

While less-advanced economies generally have higher inflation rates, Turkey and Argentina are in a class of their own. (Mauldin Economics)

• The energy threat persists:

Data: FactSet; Chart: Courtenay Brown/Axios

THE US HOUSING PICKLE

While aspiring homeowners can’t afford a new house,

existing owners do not want to sell, since moving would mean swapping a cheap mortgage for a dearer one. If rates stay at 7.4%, our analysis suggests, this “lock-in” effect could prevent a fifth of sales that would otherwise have taken place. (…) unlike borrowers in Britain and Canada, Americans cannot generally “port” their mortgages to a new property, forcing those with cheap loans to pay higher rates when they move. (…)

In previous cycles no more than 40% of borrowers had mortgages even one point below the prevailing rate. Today 87% do, and 76% pay at least two points less. (…)

How much does moving cost existing mortgage-holders? To find out, The Economist analysed data from the Federal Reserve’s latest Survey of Consumer Finances. Conducted every three years, it includes some 1,700 mortgage borrowers.

Using their incomes, their outstanding balances, the number of years left on their loans and their interest rates, we estimate that the typical borrower would pay an extra $335 a month in interest, or 3.2% of their pre-tax household income, to sell their home and buy an identical one at today’s market rate of 7.4%.

In dollars, mortgage-holders in the top fifth of earners would face the biggest bill ($558) but, relative to income, middle earners would be hit hardest (4.4% of income). (…)

By discouraging homeowners with cheap mortgages from selling, it reduces the supply of homes on the market, putting upward pressure on prices. The FHFA economists estimate that between the second quarter of 2022 and the same period in 2024 higher rates pushed down house prices by 5.6%, but the resulting lock-in pushed them up by 7%. The net effect was to make homes more expensive.

What to do? Making mortgages assumable (allowing buyers to take over a seller’s loan) or portable (allowing homeowners to transfer their mortgage to a new property) could help. The FHFA says it is evaluating both ideas. But such reforms would largely benefit future borrowers, doing little for those already locked in. For them, the only real solution is a substantial fall in mortgage rates. And, for now, that looks a long way off. (The Economist)

The Weak Points in AI Bonds Are Becoming Clearer Traders are revealing where they see the biggest pitfalls in debt issuance related to artificial intelligence

The market seems increasingly focused on risks to some of the players in the race for AI computing power. It isn’t quite as worried about the data centers that will host that computing.

While stocks are about upside, bonds are about what can go wrong. So when the bond market takes different views on different parts of the AI financing market, it can be a good guide to what investors view as the most salient risks.

“You should not view the AI trade in credit as one big trade,” says Lotfi Karoui, multiasset strategist at Pimco. “There is going to be differentiation.”

This came clearly into focus this past week when bonds issued by CoreWeave, which sells computing power to AI companies and others, sold off sharply. (…)

In effect, investors have focused on CoreWeave’s only corporate unsecured bond. But, as Goldman Sachs explains,

CoreWeave’s primary funding method for scaling AI infrastructure is via DDTLs (delayed draw term loans) – these are asset-backed project financings rather than traditional corporate debt.

Rather than underwriting CoreWeave’s standalone credit profile, lenders are primarily underwriting the combination of a specific long-term customer contract, the underlying GPU infrastructure, and the cash flows generated by that deployment. These facilities are typically secured by the associated GPUs, servers, contract revenues, and related assets, allowing lenders to leverage the credit quality of the end customer in addition to the collateral value of the infrastructure itself.

The structures have historically been largely self-amortizing, with debt maturities designed to align with contract terms so that customer payments repay principal over the life of the agreement. As a result, by the time the contract expires, the associated debt has often been substantially or fully repaid, leaving CoreWeave to capture any residual value from the GPU fleet or potential re-leasing opportunities without the burden of ongoing interest expense.

More recent transactions, particularly DDTL 5.5, represent an evolution of the model, as lenders appear increasingly active in underwriting not only contracted cash flows but also the future re-contracting potential and residual value of NVIDIA GPU infrastructure, effectively extending financing beyond the duration of the initial customer agreement.

From a risk perspective, DDTLs shift much of the financing risk from CoreWeave’s corporate balance sheet to specific customer contracts and infrastructure assets, reducing refinancing risk and limiting the amount of equity required to fund growth. The key investor debate is increasingly around residual value risk: whether NVIDIA GPU clusters will remain highly utilized and capable of being re-contracted after the initial customer agreement expires.

Back to the WSJ article:

The bonds issued to build data centers that CoreWeave will be leasing actually trade at narrower yield spreads over Treasurys than CoreWeave’s own bonds. (…)

CoreWeave bonds due in 2030 now yield close to 15%, according to MarketAxess data. A bond issued last year to finance Applied Digital’s build-out of a North Dakota data center leased to CoreWeave, however, currently yields around 8%. (…)

Effectively, investors are betting that overall demand for data infrastructure means the data center will be of use to someone, even if the current tenant runs into trouble. (…)

Earlier this year, CoreWeave reworked a lease for an Applied Digital center. The lessee became a separate entity, with its own investment-grade credit rating, which is backed by a CoreWeave computing contract with Meta Platforms. Spreads on those bonds fell sharply when that happened.

(…) if data centers become harder to build in the future, there might also be more value in one that does get done.

“With a data-center bond, you’re underwriting assets, and our view has been that when it gets completed, that can be a meaningful catalyst for spreads to compress,” says Andrew Keches, who is tech, media and telecom credit analyst and head of high-yield research at Barclays.

The bigger picture is that as the market for data center financing matures and a wider variety of bonds and business models come to market, investors might be differentiating more between credits. (…)

One critical factor is the assumed life of the compute assets. Nvidia’s contribution has been to secure lenders on the residual value of its GPUs, offering a backstop if its chips decline in value beyond a certain threshold.

The concern is not whether CoreWeave and other neoclouds are survivors but, crucially, whether a particular data center can be built and financed at reasonable costs, and on time.

The recent Microsoft exit from Nscale’s Loughton data center project in the UK is a real-world case study for why the “protection” of these massive compute contracts is conditional. It exposes the ultimate kryptonite for a neocloud operator: The Delivery Failure Clause.

Hyperscale contracts are structured as “take-or-pay” agreements, meaning Microsoft must pay for the capacity even if they don’t use it—but only if the site is operational and energized.

Microsoft pulled out of its agreement to anchor a 50 MW site because local grid officials stated that power would not be fully supplied until the 2030s.

Nscale is now hunting for alternative expansion sites across the UK that already possess unutilized, localized power hookups, hoping to re-allocate the 23,040 Nvidia GB300 chips that were originally destined for Loughton

Just a day after the Microsoft UK setback, we learned that Anthropic is in talks with Nscale for a second $45 billion computing deal involving a second facility at Nscale’s massive Monarch campus in West Virginia.