Bond market signals end to AI spending spree as yields spike

The surge in AI-related spending is being met with resistance from the bond market.

There was a period when valuations seemed limitless and spending plans appeared feasible. The moment of reckoning may have arrived, with yields on CoreWeave bonds soaring to 15%.

Throughout the year, I have highlighted the extraordinary spending promises on AI and data centers. This level of investment rivals World War II spending and represents the largest private capital commitment ever to a single cause. A significant issue is the timing gap: the intense demand for chips and electricity does not always align with supply chain capabilities. This mismatch risks substantial delays in data center activation and power availability relative to when payments are due.

Furthermore, the scramble for loans for these projects is competing with the US government, which persists in running deficits at 6% of GDP even during prosperous times, thereby swamping the bond market with supply. Additionally, the US trade war is driving foreign central banks away from Treasury securities toward other options. Last, the inflation spike has led the market to require higher returns on all bonds, raising the expense of financing this entire expenditure.

These issues are nothing new, of course.

I see four developments that are particularly noteworthy:

First, Gavin Baker asserts that the spending promises are not genuine.

Baker is a strong AI advocate, often drawing ridicule comparable to Cathie Wood when he discusses SpaceX mining asteroids. Over the weekend, he wrote the following:

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.

This strongly indicates that much of the projected spending will not materialise and that neither OpenAI nor Anthropic truly have committed partners. Additionally, token prices have been declining quickly recently.

Second, bonds from CoreWeave, Nebius and Oracle are experiencing yield spikes.

The situation is self-explanatory. The bond market is considered the most intelligent market, and it is signalling disbelief that neoclouds can generate sufficient profits to repay their massive investments.

Third, the financial figures released by Anthropic.

The data came out late the previous day, possibly even earlier via leaks. Anthropic reported $16.8 billion in third-quarter revenue, an increase of 45% quarter over quarter. However, this is insufficient to convince the market that the company is valued at $2 trillion ahead of its IPO. There is considerable concern that the IPO may represent the peak.

Fourth, the Treasury market's response this week.

Market movements can be as informative as the headlines. Despite hot CPI and PPI data over the past couple of days, a significant reversal in yields occurred yesterday and persists today. The US 10-year yield has fallen to 5.06%, down from a previous high of 5.34% earlier this month.

The implication is that even with elevated inflation, there is an increasing appetite for safe assets as the AI trade may be reversing. It appears that The Economist has correctly identified the peak.