AI tremors felt in corporate bond market
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CoreWeave was at the heart of the market's volatility Wednesday.
Why it matters: The heavily indebted, cash-burning neocloud — a data center operator that effectively rents out its AI computing capacity — is seen as something of a canary in the coal mine for the broader AI trade.
- The sharp sell-offs in its bonds and stocks underscored how jittery investors are getting about the AI investment binge.
The latest: CoreWeave's bonds had their second consecutive day of selling, pushing their yields above 15%. (Prices and yields move in opposite directions.)
- Its stock tumbled roughly 15.5%, its worst drop since February.
The big picture: The slump arrived amid weakness for AI-related stocks in recent days.
- The SOX semiconductor index, for example, fell for the sixth straight session on Wednesday and is down 7.5% this month.
- Elsewhere, a recent string of IPO delays — including Nvidia-backed data center operator Firmus in Australia — suggests that investors are uncomfortable with some AI-related valuations.
What they're saying: "CoreWeave is a bellwether for the riskier cusp of hyperscaler sentiment," John Atkins, who covers corporate bonds at PitchBook, tells Axios.
- With the recent surge in borrowing costs, he says, "people are taking a dim view of speculative borrowing that will need to be refinanced at punishingly high rates."
Zoom in: The proximate cause of Wednesday's selling was tough to pinpoint, though the pressure of rising interest rates may have had something to do with it.
- Early in the day, a hotter-than-expected Consumer Price Index for September sent Treasury yields sharply higher, with the yield on the U.S. 10-year briefly jumping above 5.30%.
- Corporate bonds can do well when government bond yields rise — especially if those government yields reflect strong, healthy economic growth.
- But sharp moves in government bond yields have a tendency to trigger sympathy sell-offs in corporate debt, analysts say.
The other side: "When you are building a new type of technology company, there will be periods of time when the market misunderstands and acts irrationally," CoreWeave CEO Michael Intrator wrote in an internal memo to staff Wednesday, adding that he was confident in the company's business model.
The bottom line: Markets overshoot all the time, but the episode does seem to have rattled investors about the AI boom.
- Indeed, Wednesday morning's sharp rise in long-end Treasury yields reversed by the end of the day, in what seemed to be a flight-to-safety trade brought on by the AI jitters.
