CoreWeave bond plunge rings alarm bells, Fed may need to reassess rate hike pace

The long-dormant corporate credit market is awakening, sending signals that put the Federal Reserve in a dilemma.

This month, bonds issued by cloud computing service provider CoreWeave took a heavy hit, with yields on its 2032 notes soaring to 15%. Yields on junk-rated and investment-grade bonds also rose to their highest levels since 2025 and 2023, respectively. This marks the return of a key channel for the transmission of monetary policy—corporate financing costs—once again restraining economic growth, an effect that had virtually failed in recent years.

The Federal Reserve resumed rate hikes in September. Columnist Jonathan Levin noted in Bloomberg that while the rise in corporate credit costs is indeed the tightening effect the Fed has long anticipated, it does not mean policymakers can fully control what comes next. With a high-yield bond maturity peak looming in 2028, if credit spreads expand chaotically, it could trigger a large-scale default wave and an increase in unemployment, rapidly eroding the wealth accumulated by households in recent years. In view of this, the Fed should stand pat at its October meeting, maintaining interest rates in the 3.75%-4% range, and weigh its December decision cautiously.

In recent years, U.S. companies relied on ultra-low borrowing costs secured during the pandemic to resist the Fed’s most aggressive hiking cycle since 2022, surprising both investors and economists. At that time, many companies issued long-term bonds or refinanced loans at extremely low rates, so when the Fed started to raise rates, their actual financing costs were barely impacted.

According to data from the U.S. Bureau of Economic Analysis, from early 2021 to the end of 2022, companies were actually net beneficiaries of rate hike expectations—because their cash holdings grew rapidly with rising rates, while the repricing of their debt was very slow. Over the following five years, net interest expenses for non-financial companies increased by only about $86 billion, while pre-tax profits surged by about $1.2 trillion to around $2.7 trillion over the same period.

This situation fundamentally severed a key link in the monetary policy transmission chain—restraining corporate investment and hiring by raising capital costs. This scenario strongly resembles the "mortgage lock-in effect," where 14 million households refinanced at mortgage rates of 2% to 3%. Now, the impact of interest expense on corporate operations is suddenly making a strong comeback.

CoreWeave's business model is highly reliant on continuous access to debt markets: it continuously borrows to purchase AI chips and expand data centers, then leases computing power on long-term contracts, aiming for returns that exceed financing costs. The premise of this model is the ability to obtain stable financing at reasonable rates; once financing conditions tighten, the entire logic falls apart.

Last week, CoreWeave’s bonds and stock price both plunged. Bloomberg reported that there was no clear single catalyst—the main reason was the overall rise in long-term Treasury yields. At the same time, market research firm Gartner Inc. released a report suggesting that AI revenues may not support the current scale of data center investment, further worsening market sentiment.

This shock is spreading more broadly. Companies like Oracle, Alphabet, and Meta have all seen borrowing costs rise due to higher U.S. Treasury yields and investor demands for higher risk premiums. With the current U.S. fiscal deficit at about 6% of GDP and expected to remain elevated, there is little room for Treasury yields to fall sharply.

According to the Bloomberg U.S. High Yield Bond Index, about a quarter of constituent bonds will mature in the next one to three years, close to a record high proportion. Elevated yields will present a severe test for issuers needing to refinance around 2028, when the maturity wall looms largest.

The impact on the investment-grade market is relatively manageable. For AI projects promising 50% returns, whether investment-grade yields are 5% or 6%, the decision-making will not be fundamentally shaken; but for projects with uncertain profit outlooks and lower returns, persistently high financing costs could put related investments on hold.

Jonathan Levin notes that monetary policy has always had "long and variable lags," but this cycle is particularly special: the duration of the breakdown in the corporate credit transmission channel is rare in decades. Meanwhile, the $78 trillion expansion in household net wealth, along with wartime-scale fiscal deficits, continues to cushion the impact of tightening policies on growth, making the real effect of monetary policy even harder to predict.

Under new chair Walsh, the Federal Reserve faces a delicate policy window. Moderate credit tightening could, as supply gaps in semiconductors and data centers gradually narrow, temper the AI capital spending boom, helping inflation return to 2% after six years of target deviation—without triggering systemic risks.

But if credit spreads widen chaotically, the 2028 maturity wall could shift from "challenging" to "unsustainable," triggering a chain of defaults and rising unemployment, and rapidly eroding wealth accumulated over many years.

Which of these two scenarios will become reality remains uncertain. It is this very uncertainty that requires the Fed to hold rates at 3.75%-4% at its October meeting and remain cautious about its December decision. The collapse in CoreWeave’s bonds has awakened the slumbering credit market; how this beast will react in the coming months is anyone’s guess.