CoreWeave rents out AI computing power from large data centers, buildings packed with computers. Its share price fell 15.5% on October 14. A share is a small slice of ownership in a company. The drop followed a move in CoreWeave's unsecured bonds. A bond is a loan that investors can buy and sell. The yield on these bonds touched 15%. A bond's yield is the yearly return its buyer earns. Unsecured bonds have no specific assets pledged behind them.
Shares of other AI data-center companies fell the same day. Oracle dropped 8.8%. Nebius Group, a CoreWeave competitor, fell more than 9%.
Reporters led with the fall in CoreWeave's share price. Bond traders had moved first. Someone posted CoreWeave's 15% bond yield on social media. Stock traders sold CoreWeave shares after that post. Shareholders can learn from that sequence. The lesson starts with how a bond works.
A bond is a loan you can trade
A company that sells a bond borrows money from investors. In return, it promises regular interest payments. Interest is the fee a borrower pays for the use of money. The company also promises to repay the full loan amount on a set date.
After that sale, investors buy and sell the bond among themselves. They agree on a new price each trading day. The interest payments written into the bond stay the same.
Because those payments stay fixed, the price a buyer pays sets the return that buyer earns.
Price down, yield up
A bond's yield is the yearly return a buyer locks in at today's price, if the company pays as promised. A buyer who pays less for the same payments earns more on each dollar spent. That higher return is a higher yield.
A falling bond price and a rising yield describe one event from two sides. Both start with a lender who wants to sell the bond.
Buyers pay less for a bond if they worry about getting repaid. They want extra return to make up for the extra risk. At a 15% yield, traders of CoreWeave's bonds demanded a large yearly return for holding them.
Big number showing CoreWeave's unsecured bonds touched a 15% yield on October 14
Comparing 15% with a safe loan
Investors judge a yield by comparing it with a safe one. The usual yardstick is the 10-year Treasury yield. That is the interest rate the US government pays to borrow for 10 years. Investors treat US government debt as the closest thing to a safe dollar loan. The 10-year yield ended the trading day at 5.19% on October 14.
That Treasury yield fell 2.7 basis points on the day. A basis point is one hundredth of a percentage point. Lenders to the US government asked for a smaller return on October 14. Buyers of CoreWeave's bonds demanded 15%.
The gap between a company's yield and the Treasury yield is the extra pay lenders want for that company's risk. Traders call this gap the credit spread. Lenders who see a higher chance of missed payments demand a wider spread.
Unsecured bonds and chip-backed debt
CoreWeave's unsecured bonds carried the 15% yield. No specific assets stand behind these bonds. If CoreWeave cannot pay, these lenders have no particular property to claim. They wait in line with the company's other ordinary lenders.
Secured debt gives the lender a claim on named assets, such as buildings or equipment. For CoreWeave, those assets can be the AI chips inside its data centers. Chip-backed debt gives lenders something to seize and sell if CoreWeave stops paying.
Credit rating firms grade borrowers on their ability to repay. An investment-grade rating means the rating firm judges the borrower likely to repay. CoreWeave co-founder Brannin McBee has said that winning investment-grade ratings for more chip-backed debt would let CoreWeave borrow from insurers. Insurance companies manage large pools of money. They favor debt with high ratings. A rating in that tier would open CoreWeave to a larger group of lenders.
CoreWeave reported a backlog of $104 billion in its most recent quarterly results, its report for the latest three months. A backlog is signed customer work that the company has not delivered or billed. Investors read a backlog as a guide to future revenue, the money a company takes in from sales. Bond buyers weigh that future revenue against the money CoreWeave borrowed to build its computing capacity. On October 14, they set the bond price after weighing the two.
Bondholders stand first in line
Bondholders, the lenders, get paid before shareholders, the owners. A company owes interest to its lenders before it can pay anything to its owners. Bankruptcy is the legal process for a company that cannot pay its debts. In a bankruptcy, lenders collect from whatever remains before shareholders get a cent. Secured lenders stand ahead of unsecured lenders.
Stock investors watch bond prices because of this order of repayment. Bondholders sit closer to the money. Their trading prices track repayment risk. Lenders who see more danger of missed payments push the yield higher. Shareholders stand behind them in that line, so lender worries matter to owners.
The stock and the bond are claims on the same company. Investors who see a sharp move in one have reason to look at the other.
A company's bond yields can rise for other reasons. Lenders charge more across the market if Treasury yields rise. A handful of trades can move the price of a bond with few buyers and sellers. Investors can compare the company's yield with Treasuries on the same day. That check separates company risk from a broad move in interest rates. On October 14, the Treasury yield fell while CoreWeave's bond yield touched 15%. Lenders were charging for risk specific to CoreWeave.
Other AI stocks fell the same day
Shares of other AI-linked companies fell with CoreWeave's. On October 14, Oracle fell 8.8%, GE Vernova 6.2%, Advanced Micro Devices 5.7%, Nvidia 3.2% and Broadcom 3.1%. These companies sell chips, power equipment or computing capacity tied to AI data centers.
Bar chart of October 14 day changes: CoreWeave -15.5%, Oracle -8.8%, GE Vernova -6.2%, AMD -5.7%, Nvidia -3.2%, Broadcom -3.1%
An index tracks the combined price of a group of stocks. The PHLX Semiconductor index, which tracks chip stocks, was down more than 10% over five days. The Nasdaq Composite, an index heavy in tech stocks, fell 1.88% on October 14. The S&P 500, an index of 500 large US companies, fell 1.1% to 7,718.94. That was its worst day since July. The VIX, a gauge of how much stock-price swing traders expect, rose 10.48% to 16.87.
The US Bureau of Labor Statistics released inflation figures the same morning. Inflation is the rise in consumer prices. Consumer prices rose 3.7% in the year to September. Economists had expected 3.6%. Lenders across the market can demand more return when inflation runs high. Companies paying high yields to borrow faced a hard day on October 14.
Dates on the calendar
TSMC, the Taiwan chipmaker, holds its third-quarter earnings call on October 15, from 14:00 to 15:30 Taipei time. On an earnings call, company executives discuss quarterly results with investors. The Federal Reserve, the US central bank, meets October 27-28 to set US interest rates. The Bureau of Labor Statistics publishes the October consumer price report on November 10 at 8:30 a.m. ET.
Reading bonds next to stocks
Stock buyers pay for a slice of future profits. Bond buyers pay for a promise of repayment. Bondholders get paid first, so their trades put a price on repayment risk.
On October 14, CoreWeave's lenders asked for a 15% yearly return. The US government paid 5.19%. Many companies on stock exchanges have bonds that trade. Their yields are public. Investors who read a company's bond yield next to its share price see what its lenders demand. The yield does not forecast where either price goes next.
Sources
- ksat.com
- fool.com
- 247wallst.com
- abcnews.com
- finance.yahoo.com
- investor.tsmc.com
- tradingkey.com
- bls.gov
Not investment advice.