The bond market is calling time out on the AI spending spree.
For a time, no valuations were too high and no spending plans unrealistic. Now it looks like we’ve arrived at the reckoning as yields on bonds from CoreWeave blow out to 15%.
I have written all year about the unbelievable spending commitments on AI and data centers. It rivals spending on WW2 and is — by far– the greatest commitment of private capital to anything. One of the problems is a timing mismatch as the insane demand for chips and power doesn’t always aling with the supply chain. That risks big slips in when data centers will come online (and be powered) compared to when the bills come due.
In addition, the rush for borrowing for these projects is competing with the US government, which continues to run deficits at 6% of GDP in good times, flooding the bond market with supply. Moreover, the US trade war is making foreign central banks turn away from the Treasury market and look to alternatives. Finally, the jump in inflation has caused the market to demand higher compensation for all bonds, making the cost of financing all this spending higher.
Of course, none of that is new.
Four things stand out for me:
1. Gavin Baker saying that the spending commitments aren’t real
Baker is an AI uber-bull and he’s nearly Cathie Wood levels of ridicule as he talks about SpaceX mining asteroids. At the same time, he wrote on the weekend that.
“No one – and I mean literally no one in the AI supply chain – takes the ridiculous $1 trillion of unfunded spending “commitments” from OpenAI and Anthropic even vaguely seriously…. If they could get out of the contracts they signed with OpenAI and Anthropic, they would as open-weight inference is more profitable for them than the below market prices currently being paid by OpenAI and Anthropic.”
That’s a big sign that much of the spending isn’t going to happen and that OpenAI and Anthropic don’t really have partners. Moreover, token prices have been falling rapidly lately.
2. CoreWeave, Nebius and Oracle bonds blowing out
This one speaks for itself. The bond market is the smartest market out there and they are calling bulls**t on the ability of neoclouds to make enough money to pay back the huge investments.
3. Anthropic’s numbers
Those were out late yesterday (and maybe leaked out sooner). The company disclosed $16.8 billion in Q3 revenue, which is a jump of 45% q/q but not enough to satisfy the market that it’s worth $2 trillion in the upcoming IPO. There is some major fear that the IPO could mark the top.
4. How the Treasury market has reacted this week
The market reaction is often as telling as the news itself. We got hot CPI and PPI numbers in the past two days, yet we saw a big reversal in yields yesterday that’s continuing today. US 10-year yields are down to 5.06% from a high of 5.34% earlier this month.
The takeaway there is that despite high inflation, there is a growing demand for safety because the AI trade could be unwinding. It looks like The Economist called the top.
This article was written by Adam Button at investinglive.com.