AI debt fears send investors rushing into government bonds

A deepening selloff in artificial-intelligence stocks and credit on Thursday, October 15, pushed investors back into government bonds in the U.S. and Europe. Data-center operator CoreWeave ↗ 1.65% was at the center of it. Sovereign debt is acting as a safe haven again after a year in which sticky inflation had driven borrowing costs to multi-decade highs.

Germany's 10-year Bund yield, the euro zone's benchmark, fell to 3.397%, just above its lowest level since July. The two-year yield dropped to 3.054%, Investing.com reported. Credit default swaps for several major AI-exposed technology and infrastructure firms widened to record highs, the outlet said. In the U.S., Treasuries rallied across the curve. Ten-year yields hit their lowest in three weeks, Bloomberg reported. "The selloff in tech sector equities continues to drive safe-haven flows into the Treasury market and pressure yields lower," said Vail Hartman of BMO Capital Markets.finance.yahoo.com+1

CoreWeave at the center

CoreWeave's shares fell again on Thursday after a 15% drop on Wednesday, even though its CEO pointed to a strong deal backlog, Reuters reported. The yield on its bonds due 2031 rose above 16%, a level that usually signals distress. The cost of insuring its debt against default climbed to about 1,000 basis points, which implies a nearly 63% chance of default within five years. According to LSEG data cited by Reuters, the loss-making company owes nearly $50 billion. In a memo, CEO Mike Intrator said markets can sometimes "misunderstand and act irrationally."galvnews.com+1

The stock selloff spread to other names. The Nasdaq Composite slid to near a one-month low, and Oracle bonds also hit record-high yields, Reuters reported. "The repricing of CoreWeave's debt suggests that investors are becoming less willing to finance AI infrastructure growth at any cost," one analyst told the agency. South Korea's chip-heavy Kospi has fallen more than 15% this week, according to Reuters. Nvidia ↘ 0.29% CEO Jensen Huang told Bloomberg he saw no need for Nvidia to backstop CoreWeave, CNBC reported.detroitnews.com+2

Inflation takes a back seat

The flight to bonds outweighed inflation worries. Treasury yields jumped after September's hotter-than-expected consumer price index on Wednesday, then reversed as AI stocks sold off, Axios reported. In Europe, ECB President Christine Lagarde said euro-zone inflation has been driven mainly by energy costs. European natural gas futures are up about 20% this month, Investing.com noted.axios.com+1

Demand for AI hardware is still strong. ASML ↘ 0.99% said on Wednesday that customers were already looking to place orders for 2029 and 2030, and TSMC Taiwan Semiconductor Manufacturing Company Limited ↗ 1.16% was expected to report a sixth straight quarter of record earnings, Reuters reported. Investors are now asking whether that revenue will arrive before the debt behind the buildout becomes a problem.galvnews.com