AI Stock Rout Contagion Reaches Credit Markets
TREE NEWS reports: The selloff in artificial intelligence stocks has spilled over into credit markets, with SoftBank Group Corp. bearing the brunt as its dollar bonds posted their largest single-day drop in nearly ten weeks. SoftBank’s 2032 dollar bonds fell 0.9 cents on Friday, while its shares plunged as much as 16% intraday. Meanwhile, spreads on Asian investment-grade dollar bonds widened by at least 3 basis points, and actively traded Asian high-yield debt also came under pressure. The volatility in credit markets, compounded by rising fiscal deficits, higher oil prices, and accelerating inflation, poses new downside risks to a global economy already buoyed by the AI spending boom.
Broader Repricing in Global Credit
The move is part of a larger repricing across global credit markets. A debt-fueled surge driven by the AI frenzy has pushed yields higher, and the recent equity turmoil has accelerated the process. The average spread on Asian investment-grade dollar bonds rose to 73 basis points on Thursday, the widest since July 2025.
Credit Selloff Less Severe Than Equities
Despite the stress, the credit selloff remains less intense than the equity market rout. Zerlina Zeng, an analyst at CreditSights, noted that falling US Treasury yields have provided some cushion for investors focused on total returns. “The selloff in both US and Asian markets has been relatively restrained,” Zeng said. She added that October’s sharp decline has attracted bargain hunters into some Asian high-yield bonds, including relatively stable real estate credits.
AI-Related Stress Transmits to Credit
The core question is whether the pressure accumulated by companies tied to the AI investment boom will trigger a more sustained repricing in Asian credit. US stocks lost about $2.3 trillion in market value on Thursday alone, and credit default swap spreads for CoreWeave, SpaceX, and Broadcom jumped to record highs. ING is reportedly seeking to sell a roughly $500 million data center loan portfolio. Meanwhile, Zeng noted that a Democratic sweep, recent heavy issuance by hyperscalers, and negative news regarding Oracle’s data center permits in New Mexico are all weighing on spreads.
Signs of stress in actual fund flows emerged even before the current volatility. Andrzej Skiba of RBC Global Asset Management said on Bloomberg Television Thursday that hedge funds have aggressively sold AI-related bonds in recent weeks, heightening the risk that the repricing of AI-related debt spreads more broadly across global credit markets.
Long-Term Thesis Intact, Market May Be Resetting Rather Than Crashing
Despite the violent swings, some market participants see the selloff as a unwind of a crowded trade rather than the end of the AI investment cycle. Brian Levitt, Chief Global Market Strategist at Invesco, said: “The pace of AI buildout may become slower and more disciplined from here. But long-term demand for AI and computing power remains intact; investors are simply recalibrating the price they are willing to pay for this opportunity.”
Zeng noted that investors are already assessing the implications of US midterm election results for tariff policy, AI investment, Iran war tensions, and US Treasury supply, and have proactively reached out to her. “Bond supply pressure from AI-related sectors remains a market focus,” she said.
Key Takeaways for Investors
- Contagion risk is real: The AI trade is no longer just an equity story; credit markets are now pricing in higher risk for AI-linked borrowers, and further widening could tighten financing conditions for the entire tech sector.
- Watch fund flows: Hedge funds have been selling AI-related bonds, and if this accelerates, it could amplify spread widening and create liquidity gaps.
- Long-term demand intact: The AI investment cycle is not over, but the pace may slow and become more disciplined. Investors should focus on quality issuers with strong balance sheets.
- Macro headwinds compound: Rising fiscal deficits, higher oil prices, and inflation add to the risk-off sentiment, making duration and credit selection critical.
