Marc O. Schmidt

The AI BUBBLE could be approaching a breaking point: The October 8th OpenAI revenue concerns offered an early warning of a broader AI trade unwind, as reports that its annualized revenue hit only $50 billion by the end of September, ~$20 billion below figures discussed weeks earlier, triggered a sharp selloff. On that day, the Nasdaq fell -1.4%, the Semiconductor Index, $SOX, dropped -3.4% and the DRAM index plunged -5.1%, while Treasury yields also declined as investors moved toward bonds looking for safety. The same pattern reappeared on Wednesday, when CoreWeave, $CRWV, cratered -15.5%, marking its largest daily decline ever, while credit markets priced in a 63% probability of the firm's default within 5 years. This comes as AI companies are accumulating MASSIVE debt to finance chips and data centers, while returns on these investments remain increasingly uncertain and higher borrowing costs drive up financing expenses. The breaking point is rapidly approaching as investors become increasingly reluctant to finance the next wave of AI infrastructure spending. On Wednesday, CoreWeave's bonds fell below 80 cents on the dollar, yielding more than 15%. A further slowdown in AI revenues, falling token prices, or persistently high interest rates could expose the gap between spending and returns, forcing companies to cut investment and triggering a broader selloff across technology stocks and credit markets. The AI frenzy is entering uncharted territory.

US Treasury may cut long-term bond issuance as borrowing costs remain ELEVATED: Citigroup expects Treasury Secretary Scott Bessent to reduce 20-year and 30-year bond auction sizes by $3 billion per sale, potentially announcing the changes on November 4th. The bank also sees the possibility of CANCELING 20-year bond auctions altogether, with reduced long-term issuance offset by additional Treasury bill sales. A dealer survey scheduled for next Friday could provide an early signal, particularly if Treasury asks whether heavy issuance from highly rated hyperscalers is diverting demand away from long-dated government bonds. This comes as Citi argues that pension funds may be directing more capital than usual toward long-term investment-grade corporate bonds. Fewer long-term Treasury auctions could push 20-year bond prices higher relative to 10-year notes, but shifting more borrowing toward short-term T-bills would change the maturity of government debt rather than eliminate its funding needs. Put simply, the Treasury would still need to finance its deficits, but relying more heavily on short-term T-bills would increase its exposure to refinancing risks and future changes in interest rates.