AI debt trouble could help Fed's Warsh get his way with fewer rate hikes

By Joy Wiltermuth

AI financing has been harder and more expensive to come by as the capital-spending boom comes under more scrutiny

AI financing has been harder and more expensive to come by as the Federal Reserve, led by Chairman Kevin Warsh, deliberates its next move on interest rates.

Pressures on Wall Street around financing the artificial-intelligence build-out have investors on edge, especially as the Federal Reserve's prepares to make its next decision on interest rates on Wednesday.

Scrutiny of the AI build-out has been ramping up for months, but has escalated further since the Fed raised interest rates for the first time in three years on Sept. 16.

The market suddenly has begun to pick up on the fact that "capital isn't infinite," said Loren Moran, fixed-income portfolio manager at Wellington Management. "I do think the Fed will probably show some early signs of awareness of financial conditions tightening."

Wall Street isn't expecting the Fed to hike rates this week, but the odds were at 73% for another hike in December, with several more increases anticipated in 2027, according to the CME FedWatch Tool.

Yet concerns about weaker parts of credit markets have become "much more glaring" since mid-September, Moran noted. "The winners are still winning, but the losers keep getting pummeled," she said.

Investors absorbed a steady deluge of high-quality debt issued by the big AI "hyperscalers" in 2026. Yet despite a recent supply pause, those bonds have still underperformed the broader market, creating angst and putting pressure on a growing part of many bond portfolios.

Worries around neoclouds like CoreWeave (CRWV) and other weaker AI players also have been growing.

CoreWeave's bonds that mature in July 2032 recently were trading at about a 15.3% yield, a sign of distress, after trading as low as 9.5% in the wake of their issuance in June, according to data from MarketAxess.

"From our perspective, investors in credit are saying 'anything but tech,'" said Andrzej Skiba, head of fixed income at RBC Global Asset Management.

Investors still like the higher bond yields on offer elsewhere, but there's trepidation right now around exposure to AI, tech, media and telecom given the heavy 2026 issuance, recent capitulation among leveraged players in the sector and concerns about funding needs going forward, Skiba noted.

"You can't promise capex at a breakneck speed when the funding market is about - or close to - shut," he added.

The AI hyperscaler group no longer only includes Alphabet (GOOGL) (GOOG), Amazon.com (AMZN), Meta Platforms (META), Microsoft (MSFT) and Oracle (ORCL), but also more "second-tier" and neocloud players such as CoreWeave and Chinese AI companies. Their combined annual capital expenditures were forecast to near $1 trillion this year, per Bloomberg data, with that figure estimated to plateau above $1.6 trillion in the next few years, as the below Deutsche Bank Research chart shows.

Meta on Monday announced plans to raise $95 billion from equity offerings in the coming months. Yet investors think that also could pave the way for the company to announce more debt issuance in the weeks ahead. Representatives for Meta declined to comment.

SpaceX's (SPCX) corporate bonds have been under pressure too, even after it priced a $40 billion private chip financing deal.

It's been a tough year since the artificial-intelligence spending boom - among the biggest U.S. infrastructure projects on record - largely pivoted away from using free cash flow and toward a heavy reliance on debt issuance for funding.

Skiba at RBC said the biggest AI players still seem pretty unfazed by higher borrowing costs, but that the Fed probably doesn't need to be super aggressive in hiking rates after December.

"It's been a lot of indigestion," said Tim Crawmer, global credit strategist at Payden & Rygel. "I think people are cautious to add more AI and tech risk into their portfolios, because they just know there's going to be more issuance to come."

-Joy Wiltermuth

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10-27-26 0734ET