For the AI infrastructure boom, the winning formula was to borrow heavily to build quickly. That strategy backfired on CoreWeave Inc. (NASDAQ:CRWV). Shares fell 6.4% to $65.25 by 9:40 a.m. ET on Friday, putting the stock on track for a weekly loss of about 22%. A close at that level would be its lowest since May 2025.
CoreWeave's five-year credit default swaps — contracts that insure investors against a missed debt payment — hit a record 1,194.5 basis points on Thursday, according to ICE Data Services data reported by Bloomberg.
That price implies a more than 60% chance of default within five years, by standard market calculations.
Its 9.75% notes due October 2031 slipped to 81.80 cents on the dollar on Friday, yielding 15.08%. Two months ago, the same bonds yielded about 12%.
Why Higher Rates Hit CoreWeave First
CoreWeave rents out Nvidia-powered computing capacity to AI developers. It buys the chips and builds the data centers before the rent arrives, and it borrows to fill the gap.
In the second quarter, it generated $679 million in operating cash flow while spending about $6.4 billion on equipment. Net interest expense more than doubled to $640 million.
That model worked when money was cheap.
On Friday, the 10-year Treasury yield rose 4 basis points to 5.12%. The 30-year rose 3 basis points to 5.45%, and the 2-year held at 4.76%.
Wednesday's hotter-than-expected inflation report raised the odds of another Federal Reserve rate hike on Oct. 28. CoreWeave fell 15.5% that day.
'Darwin Moment'
"Data centre bonds are having their Darwin moment, where the weakest credits struggle to survive," Ludovic Subran, chief investment officer at German insurer Allianz, told the Financial Times this week.
Rival neocloud Nebius Group N.V. (NASDAQ:NBIS) is down about 20% this week.
Bank of America's Michael Hartnett sees the pressure moving up the food chain.
"We continue to lean risk-off next 3-4 weeks," the chief investment strategist said in his weekly Flow Show note.
He cited 3% inflation-adjusted yields, the Nov. 3 midterms and weak trading in AI "spenders and lenders."
The spenders are CoreWeave's customers: Amazon, Alphabet, Meta, Microsoft and Oracle. The lenders include private credit firms, banks and bondholders.
Their AI spending is expected to reach $807 billion this year. As a result, their combined free cash flow is forecast to swing from $191 billion in 2025 to minus $63 billion this year, according to consensus estimates compiled by Bank of America.
Signal to Watch
"A rollover in semi prices signals further tightening of AI credit," Hartnett said, expecting an October Fed hike to restore credibility. Consumer prices have run above the Fed's 2% target for 66 consecutive months.
In his view, a hike could pull long-term Treasury yields down another 20 basis points and limit losses in risky assets.
The question now is which companies can afford to finance the AI race at elevated interest rates.
