The bond market is telling me this about AI
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The bond market is seeking answers. CoreWeave, a major data centre operator saw its shares hit a 52-week low. Its bonds, which were issued in June with a 9.625% yield, have dropped in price. This pushed its yield to around 15% recently. This means, any investors who are buying CoreWeave’s bonds are demanding a 15% return to compensate for its credit risk. I would say this is a canary in the coal mine for its debt-funded AI expansion. The company continues to burn enormous cash. And this data centre operator can’t stop building. It expects a capex this year of between US$35-39 billion. This tells me: can AI companies actually pay back their massive debt? AI is getting cheaper and faster than computers ever did. The cost of AI performance is dropping by roughly 47% per quarter. That’s 13x cheaper per year. This is outpacing historical price declines of compute, DNA sequencing, lithium batteries and electricity. Credit: Epoch AI But here’s the paradox. As AI becomes cheaper, more and more people will use it for many things, including videos, autonomous agents, and complex reasonings. Last night, I had a call with my analyst. He mentioned what’s really using up a huge amount of tokens are generative AI that creates new content across images, music, videos, computer codes. Today, people are using AI more than just searching for queries. The longer the answer the more reasoning required, the greater the compute cost. So the total spending on AI infrastructure can't stop. I’ve said in my previous Market Memos: “There’s no stopping the hyperscalers and AI companies from riding this momentum machine. Investment banks have projected a US$5 trillion capital investment into AI, across data centres and in infrastructure through 2030. This AI build-out is greater than that for building railroads, canals and electric grids combined - becoming the biggest bet globally. But I'll tell you what’s madness. Everyone believes AI demand will keep growing forever. So the money keeps pouring in: capital, talent, more data centres. Throw politics and governments into the mix, and prices go nuts.” Because the cheaper AI gets, it’s harder for companies to earn attractive returns on their enormous AI investments. The big question is: who will continue to pay for all these? As a dividend investor, I would pay attention to what the bond market is telling me. And it’s already telling me how nervous it is. Sometimes, investing can be simple. - Willie Keng, CFA Founder, DividendTitan.com |
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