by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on rising concerns about the AI buildout. We then turn to geopolitics, examining the US’s potential decision to relax sanctions in response to growing voter pushback. Next, we briefly cover a bill to tax data centers, the possibility of another US strike on Iran, and an update to the debt outlook for an AI developer. As always, we conclude with a review of recent domestic and international economic data.

AI Slowdown: Concerns about speculative AI debt have fueled optimism that the Fed may not need to tighten monetary policy as aggressively. This shift in sentiment stems from a potential slowdown in the AI buildout, driven by doubts over whether certain data center operators can service their debt. The market reaction highlights the significant impact this expansion is expected to have on US Treasurys and provides Fed officials with additional factors to consider when making their rate decision later this month.

• Debt sustainability became a major concern for investors following a surge in credit default swap (CDS) prices for CoreWeave. Because CDS contracts function as insurance against default, their prices serve as a proxy for credit risk. On Thursday, the rising cost of these contracts implied a roughly 60% probability that the company would default on its debt within five years.
• Much of this worry comes from CoreWeave’s rising debt load and its perceived reliance on circular financing. Nvidia — acting simultaneously as a primary supplier, equity holder, and key financier — has funded much of the capital CoreWeave uses to purchase its graphics processing units (GPUs). Seeking to calm investors, Nvidia’s CEO noted that despite market fears over debt quality, CoreWeave does not require an additional backstop and its cost of capital is actually decreasing.
• Following the recent turmoil surrounding CoreWeave, investors rushed to safe-haven assets, driving up demand for sovereign debt. Yields on the 10-year US Treasury fell to their lowest level in nearly a month, while German government bonds also saw increased demand. This shift reflects growing investor expectations that debt concerns could slow the AI buildout, which has been a major source of demand-side price pressures across the economy.
• As the Federal Reserve prepares for its next meeting, officials are likely to weigh recent AI-related market turmoil when setting interest rates. Minutes from the September FOMC meeting reveal deepening concern among Fed leadership over AI’s impact on prices and the risk of broader economic contagion. Consequently, a potential slowdown in the AI buildout could alleviate some of these worries and reduce the need for a rate hike before December.

Sanctions Relief? The White House is seeking to ease energy market stress by relaxing some of its restrictions. On Thursday, it was reported that the Trump administration may allow shadow fleets from Russia and Iran to sell their fuel, in an effort to ease the strain on oil prices. The change is due to the weight that the president’s foreign policy has on voter sentiment going into the midterms. While the US plans to maintain pressure on its rivals after the midterms, the shift does represent another example of its lack of commitment to its hegemonic role.

• A proposed rollback of maritime restrictions would allow blacklisted vessels to be sold to legitimate operators and return to normal service. While not yet finalized, the move comes as the US loosens restrictions on Russian diesel and urges the EU to tap strategic energy reserves to relieve global market pressure. If enacted, these measures should help increase shipping capacity and lower freight rates over the coming weeks.
• The changing US stance has not gone unnoticed by its allies. European Union leaders have pushed back against Washington’s efforts to ease pressure on Moscow, growing suspicious of the White House’s foreign policy direction. Brussels has already signaled to the Trump administration that it will not unfreeze Russian assets unless Moscow halts the war. Furthermore, the EU is accelerating plans to develop an alternative to Starlink following disruptions in satellite support for Ukraine.
• A growing preference for domestic priorities over foreign commitments is driving a noticeable shift in US policy. Over the past five years, public approval across successive administrations has suffered under the weight of foreign entanglements. Geopolitical friction with Iran and Russia has proven particularly costly, as the resulting energy supply shocks inflicted direct economic pain on US consumers in the form of elevated inflation.
• A retreat from the US’s global hegemonic role will likely have profound implications for commodity markets. Historically, US leadership has provided systemic stability for global commerce by securing sea lanes and promoting open trade. A withdrawal of this support could accelerate market regionalization, as rising transportation and insurance costs make long-distance commodity trade increasingly expensive.

Data Center Pushback: Senators Bernie Moreno (R-OH) and Josh Hawley (R-MO) have introduced joint legislation aimed at taxing data center construction. Under the proposed bill, any state incentives — including loans and grants used to attract data centers — would face a 100% federal tax. While the bill’s chances of passage remain slim, the initiative underscores how lawmakers are taking an increasingly hardline stance on data centers to address voter anxiety surrounding the AI buildout.

New Iran Attack? The White House continues to hint at the possibility of resuming military operations against Iran after the midterm elections. On Thursday, the president stated he would not drop a nuclear bomb but refused to rule out using the “Mother of All Bombs,” a weapon powerful enough to rupture the lungs of those nearby. His remarks come amid widespread expectations that the US could resume military action post-election as part of an effort to eliminate Iran’s nuclear capabilities.

Anthropic Debt: While data center developers have come under scrutiny over debt quality, one leading AI lab is seeing a more favorable credit outlook. On Friday, Kroll Bond Rating Agency (KBRA) assigned Anthropic a credit rating just one notch below investment grade. Although the rating was based on selective disclosures that omitted core financial metrics such as free cash flow and EBITDA, the move is expected to bolster market perception of its debt and potentially pave the way for lower future borrowing costs.

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