Liz’s view
How does Wall Street quantify fear? Political boogeymen get names (Red Menace, death panels); financial ones get numbers. The VIX captures the market’s twitchiness, while credit-default spreads calculate the odds of a company going bust.
When it comes to AI jitters, the price of fear is settling somewhere around 200 basis points.
When SpaceX issued its first corporate bonds — back in the giddy, futuro-optimist days of… four months ago — it paid 6.65% for the most expensive piece. The most expensive slice of the $40 billion of private credit borrowing it’s finalized in recent days will cost as much as 8.75%, a person familiar with the matter said, having shot higher since we reported on price talks last week.
Breaking down that gap: At least 25 basis points can be attributed to the Fed’s September rate hike and expectations of another one by the end of the year.
The rest comes down to pure nerves. Those 200 basis points translate into hundreds of millions of dollars of extra borrowing costs that can’t be pinned on the Fed or the overdue sobering-up among lenders. It owes squarely to the growing doubts about the ROI of AI and whether borrowers will be good for the money.
Elon Musk touted the deal as a sign of SpaceX’s strength, gliding over its eye-watering cost. “As of the past few weeks, debt markets have almost entirely shut off access to money for any company that doesn’t have substantial revenue independent of AI data centers,” he posted on X Sunday. “We’re investment grade and have Starlink & launch revenue.” And yet the market is pricing a BBB company like it’s two rungs lower.
There’s also, as one executive at an AI infrastructure fund put it to me last week, the “supply-demand imbalance” — finance-speak for AI needs a lot of money and investors need to catch their breath. For now, the AI anxiety appears confined to credit investors, by nature a more dour and pessimistic bunch than stockholders. But fear is contagious, and if it spreads to stockholders, things could get ugly quickly.
Notable
- “The credit market is getting jammed right now because it hasn’t figured out a good way to offload” AI-related risks, Citadel’s co-CIO Pablo Salame told Bloomberg. “AI’s rising tide will sink some boats, and it’s a wavy tide.”