According to Woofun AI, the bonds of cloud computing service provider CoreWeave (CRWV.US) suffered a severe setback this month, and the yield on its notes due in 2032 soared to 15%. This extreme market signal forced the Federal Reserve to choose to stay on hold and carefully weigh the next policy path at the October meeting.
The corporate credit market, which has been dormant for many years, is waking up, and the signals it sends have left the Federal Reserve facing a dilemma. The yield on junk grade and investment grade bonds also rose to the highest level since 2025 and 2023, respectively, indicating that corporate financing costs, a key channel for monetary policy transmission, are once again playing a role in inhibiting economic growth — an effect that has almost failed over the past few years. The Federal Reserve restarted raising interest rates in September. Columnist Jonathan Levin wrote in Bloomberg that this rise in corporate credit costs is certainly an effect of austerity that the Federal Reserve has been expecting for a long time, but it does not mean that policymakers can fully control the next trend. Against the backdrop of the peak maturity of high-yield bonds approaching in 2028, if credit spreads expand in a disorderly manner, it may trigger a wave of large-scale defaults and a rise in unemployment, which in turn will rapidly erode the wealth of residents accumulated in recent years.
In view of this, the Federal Reserve should stay on hold during the October interest rate meeting, maintain the 3.75% to 4% interest rate range unchanged, and carefully weigh the December decision. Over the past few years, US companies have weathered the Federal Reserve's most aggressive interest rate hike cycle since 2022 with ultra-low borrowing costs locked in during the pandemic, much to the surprise of investors and economists. At the time, a large number of companies issued long-term bonds or completed loan refinancing at extremely low interest rates. When the Federal Reserve began to raise interest rates, the actual financing costs of these companies were hardly impacted. From the beginning of 2021 to the end of 2022, companies were actually the net beneficiaries of interest rate hikes — because the return on their cash reserves grew rapidly as interest rates rose, while debt-side repricing was extremely slow.
According to data compiled by Woofun AI, in the next five years, net interest expenses of non-financial companies only increased by about $86 billion, while profit before tax surged by about 1.2 trillion US dollars to about 2.7 trillion US dollars during the same period. This situation fundamentally cuts off a key link in the transmission chain of monetary policy — that is, curbing corporate investment and recruitment by raising capital costs. This situation is similar to the “mortgage lock-up effect” of 14 million households refinancing their mortgages at 2% to 3% interest rates. Now, the impact of interest expenses on business operations is suddenly returning.
CoreWeave is an extreme case, but it maps a wider range of risks. CoreWeave's business model is particularly dependent on continuous access to debt market financing: through continuous borrowing to buy AI chips, expand data centers, and rent computing power in the form of long-term contracts to earn returns that exceed financing costs.
The premise of this model is that capital can be obtained stably at a reasonable interest rate. Once the financing conditions are tightened, the entire logical chain is broken. Both CoreWeave bonds and stock prices collapsed last week. Bloomberg reports that there is no clear single catalyst, mainly due to the overall rise in long-term treasury bond yields. Market research firm Gartner Inc. (IT.US) released a report at the same time, pointing out that AI revenue may be difficult to support the current scale of data center investment, further exacerbating market pessimism. The impact is spreading to a wider area. Borrowing costs for companies such as Oracle (ORCL.US), Alphabet (GOOGL.US), and Meta (META.US) have all risen due to rising US Treasury yields and investors demanding higher risk premiums. Currently, the US fiscal deficit accounts for about 6% of GDP and is expected to remain high, so there is very limited room for a sharp decline in treasury bond yields.
The 2028 expiration peak poses systemic pressure. According to the Bloomberg US High Yield Bond Index, about a quarter of the component bonds will expire within the next one to three years, accounting for a share close to the highest level in history. High yields will pose a severe test for issuers that need to refinance centrally around 2028, when the maturity pressure barrier is most difficult. The impact on the investment-grade market is relatively manageable. For AI projects with a return of 50%, regardless of whether the investment-level return is 5% or 6%, the decision to advance will not be fundamentally shaken; however, for projects with uncertain profit prospects and low returns, if high financing costs continue, related investment plans may be shelved. Jonathan Levin pointed out that monetary policy has always had “long and variable lag effects,” but this round is particularly special: the duration of failure of corporate credit transmission channels has been rare for decades.
At the same time, the increase in residents' net wealth of up to 78 trillion US dollars and the wartime fiscal deficit continued to cushion the impact of austerity policies on growth, making it more difficult to predict the actual effects of monetary policy. Under the new Chairman Walsh, the Federal Reserve faces a delicate policy window. Moderate credit tightening is expected to moderately cool the AI capital expenditure boom while gradually closing the supply gap related to semiconductors and data centers, thereby driving inflation back to 2% after deviating from the target for nearly six years without causing systemic risks. However, if credit spreads expand in a disorderly manner, the peak of debt maturity in 2028 will evolve from “challenging” to “unsustainable”, triggering chain defaults and rising unemployment, and rapidly eroding residents' wealth accumulated over many years. Exactly which of the two scenarios will become reality is still uncertain. It was this uncertainty that required the Federal Reserve to maintain interest rates in the 3.75% to 4% range during the October interest rate meeting and to be cautious about the December decision. The collapse of CoreWeave bonds has awakened the slumber credit market, and no one can predict how this giant will react in the coming months.