CoreWeave Bond yields soared to 15% at one point, with junk and investment-grade bond yields also reaching their highest levels since 2025 and 2023, respectively. A Bloomberg column pointed out that the peak maturity of high-yield bonds in 2028 is approaching. If credit spreads expand disorderly, it could trigger a wave of defaults and rising unemployment. The Federal Reserve should refrain from taking action at its October interest rate meeting, maintain the interest rate range of 3.75% to 4%, and carefully weigh its options for the December decision.

The corporate credit market, which has been dormant for many years, is beginning to awaken, and the signals it emits present a dilemma for the Federal Reserve.

The bonds of cloud computing service provider CoreWeave suffered a significant setback this month, with the yield on its 2032 maturity notes soaring to 15%. The yields on junk-grade and investment-grade bonds also reached their highest levels since 2025 and 2023, respectively. This indicates that the cost of corporate financing, a key channel for the transmission of monetary policy, is once again playing a role in curbing economic growth—a effect that has been nearly non-existent in recent years.

The Federal Reserve restarted interest rate hikes in September. Bloomberg columnist Jonathan Levin pointed out that while the increase in corporate credit costs is indeed the tightening effect that the Fed has long anticipated, it does not mean that policymakers can fully control the subsequent developments. With the peak maturity of high-yield bonds in 2028 approaching, if credit spreads expand disorderly, it could trigger a wave of large-scale defaults and rising unemployment, which in turn would rapidly erode the wealth accumulated by residents in recent years. In light of this, the Fed should hold its fire at the October policy meeting, maintain the interest rate range between 3.75% and 4%, and carefully weigh its decisions for December.

The corporate financing shield fades, and credit transmission is reactivated.

Over the past few years, American companies have managed to withstand the Fed's most aggressive interest rate hike cycle since 2022, thanks to the ultra-low borrowing costs during the pandemic. This has come as a surprise to investors and economists. At that time, many companies issued long-term bonds or refinanced loans at extremely low interest rates, and when the Fed began raising rates, the actual financing costs for these companies were hardly affected.

According to data from the Bureau of Economic Analysis (BEA) of the United States, from the beginning of 2021 to the end of 2022, businesses were actually the net beneficiaries of rising interest rates. This was because the returns on their cash reserves increased rapidly as interest rates rose, while the repricing of their debt obligations was extremely slow. Over the following five years, non-financial businesses' net interest expenses only increased by about $86 billion, while their pre-tax profits surged by approximately $1.2 trillion to around $2.7 trillion during the same period.

This situation fundamentally cuts off a key link in the monetary policy transmission chain – namely, suppressing corporate investment and hiring by raising the cost of capital. This is precisely the same as the “mortgage lock-in effect” observed when 14 million households refinanced their mortgages at interest rates between 2% and 3%. Now, however, the impact of interest expenses on corporate operations is suddenly returning.

CoreWeave is an extreme case, yet it reflects a broader range of risks.

The business model of CoreWeave relies heavily on continuous financing from the debt market: by continuously borrowing to purchase AI chips and expanding data centers, it then rents out computing power through long-term contracts to earn returns that exceed the cost of financing. The premise of this model is the ability to obtain funds at a reasonable interest rate; however, once financing conditions tighten, the entire logic chain breaks down.

Last week, both CoreWeave bonds and stock prices tumbled. Bloomberg reported that there was no apparent single catalyst for this, with the main reason being the overall increase in long-term government bond yields. Market research firm Gartner Inc released a report during the same period, stating that AI revenues might not be sufficient to support the current scale of data center investments, which further exacerbated market pessimism.

This impact is spreading over a wider range. The borrowing costs of companies such as Oracle, Alphabet, and Meta have increased due to rising U.S. Treasury yields and investors' demand for higher risk premiums. Currently, the U.S. fiscal deficit accounts for about 6% of GDP, and it is expected to remain high, leaving very limited room for a significant decline in Treasury yields.

The peak maturity in 2028 constitutes systemic pressure.

According to Bloomberg's US High-Yield Bond Index, approximately a quarter of the constituent bonds will mature within the next one to three years, representing a proportion close to historical highs. The high yields pose a severe challenge for issuers that need to refinance around 2028, as that time will see the most intense maturity pressure.

The impact on the investment-grade market is relatively controllable. For projects like AI with a return rate of 50%, whether the investment-grade yield is 5% or 6%, the decision-making process will not be fundamentally shaken; however, for those projects with uncertain profit prospects and lower return rates, if high financing costs persist, the related investment plans may have to be put on hold.

Jonathan Levin points out that monetary policy has always had a 'long and variable lag effect,' but this round is particularly special: the duration of the failure in the corporate credit transmission channel is rare over the past few decades. At the same time, a net increase in residents' wealth of up to $78 trillion, along with fiscal deficits on a wartime scale, continue to mitigate the impact of tightening policies on growth, making it even more difficult to predict the actual effects of monetary policy.

A narrow line separates benign tightening from the risk of disorder

Under the leadership of the new chairman, Walsh, the Federal Reserve faces a delicate policy window. A moderate tightening of credit is expected to gradually cool down the boom in AI capital spending while simultaneously helping to close the supply gaps related to semiconductors and data centers. This approach aims to bring inflation back to 2% after it deviated from the target for nearly six years, without triggering systemic risks.

However, if the credit spread expands in an uncontrolled manner, the debt maturity peak in 2028 will evolve from "challenging" to "unsustainable," which could trigger a chain of defaults and rising unemployment, and rapidly erode the wealth accumulated by residents over the years.

Which of these two scenarios will become a reality is still uncertain at present. It is this uncertainty that requires the Federal Reserve to maintain interest rates in the range of 3.75% to 4% at its October meeting and to remain cautious about its decisions for December. The plummet in CoreWeave bonds has awakened the dormant credit market, and no one can predict how this giant will react in the coming months.