Asia shares subdued, bonds swamped by AI debt wave

Asian shares declined on Thursday due to mounting challenges in sovereign bond markets. Reports emerged that major tech firms were seeking billions in debt to finance AI chip purchases, leading to heightened competition for limited funding. Oil prices surged, putting additional pressure on Treasury bonds, although a successful auction of US 10-year debt helped curb yields from their 24-year highs.

This increase in borrowing costs negatively impacted equities, with Japan's Nikkei falling 0.9% and South Korea down 0.6%. MSCI's Asia-Pacific index outside Japan slipped 0.1%. On Wall Street, S&P 500 and Nasdaq futures showed minimal change, while EUROSTOXX 50, DAX, and FTSE futures all marginally improved after a Wednesday slump.

Reports surfaced that companies like SpaceX, Broadcom, and Oracle were raising capital to acquire AI chips. Broadcom aimed to raise $50 billion, SpaceX planned to issue $30 billion in investment-grade debt, and also sought $10 billion in loans to buy chips from Nvidia. SpaceX's credit default insurance surged to record highs, resulting in a decline in its shares and bonds.

Nigel Green, CEO of deVere Group, cautioned that the AI expansion is transitioning from cash to credit, altering the risk profile. "Debt must be repaid on schedule, regardless of revenue," he emphasized. "This debt is embedded in bond funds and pension portfolios worldwide."

While this investment in AI equipment could benefit semiconductor and memory sectors, the mounting corporate debt coincides with sovereign bond markets being strained by inflation concerns, widening budget deficits, and rising cash rates. Federal Reserve minutes revealed a majority of members expected another rate hike by year-end, with a 19% chance of a move this month and an 80% expectation of a December hike.

However, market pricing suggests only an 80% probability of a rate increase in December. Goldman Sachs analysts anticipate a second Fed hike in December but anticipate the Fed may conclude further tightening is unnecessary. The prospect of a rate pause helped maintain 2-year Treasury yields at 4.78%, while 10-year yields rose to 5.298%, climbing from a 24-year peak of 5.326% overnight.

France's bond market turbulence led the Bank of France to acknowledge its economic situation as serious but reassure investors it did not require ECB assistance. The euro weakened against the dollar, losing 0.6% overnight, leaving it near a 17-month low.