CoreWeave Jitters Spur Investors to Sell Corporate Bonds, Buy U.S. Treasuries; Dollar Falls

"'Risk Indicator' CDS Premium Surges
Unease Persists Despite Jensen Huang's Reassurance on Financial Health
U.S. Treasury Demand Sends Yields Down 10 Basis Points"

Concerns about the financial health of U.S. artificial intelligence (AI) infrastructure company CoreWeave spread across financial markets, prompting investors to sell AI-related corporate bonds and buy large amounts of U.S. Treasuries, a safe-haven asset. As demand for Treasuries improved and yields fell, the U.S. dollar posted its biggest drop in more than a month.

CoreWeave's 'Risk Indicator' CDS Sounds Alarm

CoreWeave logo. Reuters-Yonhap News Agency.

According to CNBC, The Nikkei and other outlets on October 15 local time, the premium on five-year credit default swaps (CDS) for CoreWeave topped 1,140 basis points (1 basis point = 0.01 percentage point) during the day's trading. It later fell to around 1,038 basis points, but remained 16% higher than a week earlier and 164% higher than a year earlier. A CDS premium is a cost similar to an insurance premium against default. A reading above 1,000 basis points is generally seen as a sign of credit distress.

CoreWeave is a major AI cloud company backed by Nvidia. It uses Nvidia semiconductors to provide AI computing services. The yield on the company's bonds maturing in 2031 surged to 15.78% the previous day, more than 10 percentage points above that of U.S. Treasuries with a similar maturity. This reflects growing doubts about whether CoreWeave, which has borrowed heavily to build AI data centers, can generate enough cash to service its debt. Investors in Silicon Valley, including Tesla CEO Elon Musk, have also voiced concerns recently.

However, CoreWeave shares rebounded after Nvidia CEO Jensen Huang expressed optimism at a Bloomberg event that day, saying, "CoreWeave's financial health is improving every day." Nvidia is also one of CoreWeave's major investors. After plunging 15.5% on October 14, CoreWeave shares closed up 5.94% on October 15, just a day later.

"Moving Into Safe-Haven Assets Like U.S. Treasuries"

Reuters-Yonhap

Credit concerns surrounding AI companies also affected foreign exchange markets. According to Bloomberg, the Bloomberg Dollar Spot Index, which tracks the dollar against major currencies, fell 0.3% that day, its biggest drop since September 3. The dollar weakened against most major currencies.

Bloomberg attributed the move to investors selling corporate bonds issued by heavily indebted AI companies and shifting their money into relatively safe U.S. Treasuries. A surge in Treasury buying pushed prices up and yields down. The yield on 10-year U.S. Treasuries fell about 10 basis points, from 5.19% the previous day to 5.09% that day. Falling Treasury yields reduced the relative yield appeal of dollar-denominated assets, putting further downward pressure on the dollar.

The dollar weakened even as inflationary pressures in the United States remained persistent. Producer prices rose 1.3% in September from the previous month, the biggest increase in more than four years, according to data released that day, while retail sales also exceeded expectations. Rising prices typically boost expectations of interest rate hikes and support the dollar. But on this day, falling Treasury yields amid concerns about AI investment appeared to have a greater impact.

Andrew Hazlett, a foreign exchange trader at Monex, said, "Selling of AI-related debt is putting downward pressure on the dollar as investors move into safe-haven assets such as U.S. Treasuries." Brent Donnelly, president of Spectra Markets, also pointed to the U.S. economy's heavy reliance on AI investment, saying, "If capital spending on AI has peaked, the dollar is a sell."

This content was produced with the assistance of AI translation services.