Oh, What a Tangled Web We Weave… — 2026-10-15
Core thesis: Credit stress at a single AI player (CoreWeave) is cracking the market's willingness to ignore rising rates, because AI borrowers have been pricing in "essentially infinite" ROI. If this spreads to larger borrowers, it could trigger a secular shift in asset allocation—similar to pre-1987 dynamics.
Key points:
- CRWV 9.625% bonds (due 2032) yielded 15.568% vs. 5-year Treasury at 4.85%—a 1,070 bp spread reflecting genuine credit concerns despite Moody's B1 rating.
- Yesterday's sequence: bad CPI → bond selloff → CRWV troubles → tech selloff → flight-to-safety bond rally. This morning, PPI beat expectations (0.7% headline, 0.5% core vs. 0.3% expected), yet Treasuries rallied 8–10 bps—pure risk-off, not inflation-driven.
- Retail (IBKR customers) dip-bought tech; institutions rotated. SPX now slightly positive, NDX still down >0.5%; 7 of 11 sectors positive, but tech weakness dominates due to index weight.
- The "feedback loop" thesis—marginal AI borrowers indifferent to rates because perceived ROI is infinite—is now broken. Lenders are repricing credit risk.
Takeaway: Watch for contagion to larger AI/tech borrowers (cf. ORCL CDS precedent). If institutional asset allocation trades persist at scale, consequences may take weeks to manifest but could be structural. Current rotation away from tech is a warning signal, not yet capitulation.