Meta's earnings report triggers widening of AI credit spreads; Goldman Sachs admits pessimistic scenario has been surpassed

Last week, Meta's earnings triggered a sharp widening of AI credit spreads, with its credit default swaps (CDS) hitting an all-time high, and Goldman Sachs' AI basket falling 23% cumulatively since June. Tony Pasquariello, head of Goldman Sachs' hedge fund products, said bluntly in an internal weekly report that in his multiple conversations with credit market veterans, the word "melting down" was repeatedly mentioned.

Meanwhile, Goldman Sachs' chief credit strategist Amanda Lynam acknowledged in her latest report that U.S. investment-grade (IG) and high-yield (HY) credit spreads are rapidly approaching the previously set downside-scenario peaks, and she expects them to "modestly exceed" that range, with risks "clearly skewed toward further widening."

The turmoil has spread from the corporate bond market to the sovereign bond market, and has begun to extend into European sovereign debt. The spread between French 10-year government bonds and German bunds has widened to 178 basis points, the widest level since the 2011 European debt crisis, and the yield on French 10-year government bonds has breached 5% for the first time since 2002. The market is facing a rare combination of AI financing pressure, year-end deleveraging sentiment and European sovereign risk.

Meta's earnings were the trigger. The company reported its first quarter of negative free cash flow since its 2012 IPO, and its CDS immediately hit an all-time high while its stock price fell sharply. Brad Shelofsky, head of investment-grade credit trading at Goldman Sachs, characterized last week as "a major repricing of AI risk, and a comprehensive, aggressive deleveraging of crowded positions by the market."

In his weekly report, Pasquariello laid out the core logic of how the AI trade turned into a bond market problem: there is no problem on the demand side, and the large tech companies "continue to execute well," but the problem lies in everything needed to meet that demand—"as forward spending commitments continue to accumulate, the market is asking very pointed questions about the supply of the necessary raw materials, the two most prominent variables being power and capital."

Goldman Sachs rates trader Mitchell Cornell described the transmission chain: the market regime of rising rates and rising volatility was partly driven by "AI capital expenditure bond issuance," after which "confidence in some highly leveraged AI companies began to waver." Dallas Fed President Lorie Logan said she estimates the target range for the policy rate needs to be raised by at least another 50 basis points. The AI capital expenditure business model built in the era of cheap money is now facing a fundamental challenge from the monetary environment.

Goldman Sachs' pessimistic scenario has already been overtaken by reality

Goldman Sachs credit strategist Amanda Lynam had previously set the downside-scenario peaks for the U.S. credit market at: investment-grade spreads of 93 basis points and high-yield spreads of 335 basis points—her "bear-market baseline." However, in her latest report, Goldman Sachs admitted that this assumption is no longer pessimistic enough:

"For the dollar market, we had previously used the March 2026 spread peaks as the baseline for our downside scenario (IG 93bp, HY 335bp). However, we are rapidly approaching these levels and now expect spreads to modestly exceed the above range."

Lynam listed three pressures currently facing the credit market: first, considerations of rising cost of capital; second, the multi-year financing wave brought about by AI-related investment expectations; and third, positioning and year-to-date performance dynamics, the latter of which "may be exacerbating the recent 'risk-off' move." She believes that from now until early December, risks are "clearly skewed toward further widening."

Nevertheless, Lynam still maintains that "a substantial, sustained widening of credit spreads would require a sharp downturn in economic activity, which is not our baseline scenario," and she maintains her year-end target of spreads "modestly narrowing" from current levels—citing the seasonal tightening effect usually brought about by slower December supply. However, hyperscale tech companies such as SpaceX and Meta are preparing the largest investment-grade bond deals of the year, and this optimistic assumption faces a severe test.

Financing pressure on hyperscale tech companies ignites the market

The two core sources of market pressure both point to financing rather than revenue.

On the SpaceX side, Musk said on the earnings call that there is a "small but non-zero" possibility that more than 20GW of superintelligent compute will come online next year, and he expressed high confidence in deploying roughly 10GW of incremental compute. Yet as of the end of the third quarter, SpaceX had only 1.7GW of compute and plans to reach 3GW by year-end. The market is "highly focused on the cost of about $50 billion per GW"—at 10GW, a single company's capital expenditure would reach $500 billion.

Subsequently, SpaceX's previously reported $40 billion chip financing plan (originally scheduled for 2027) was disclosed as "likely to price next week." As a result, the SpaceX bond curve flattened sharply: the SPCX 5.35% 2031 bond widened by 55 basis points that week to T+225, and the 6.65% 2056 bond widened by about 25 basis points to T+285.

Meta, meanwhile, left a rare admission in its 14C filing, pointing directly to the narrowing window in the capital markets: "The Special Committee also recognizes that timing is critical to securing capital before competitors exhaust various financing channels. Other prominent companies have recently completed large-scale financings, and more are expected to follow soon in support of the same AI growth objectives—this has led to an increasingly challenging financing environment."

NVIDIA CEO Jensen Huang put it more bluntly: "The demand for capital far exceeds the supply of capital. This problem will eventually be resolved." But as Shelofsky pointed out, the way it gets resolved will be through price—that is, wider spreads.

The bond market suffered its "worst week in history"

Looking at the specific data, the market damage is startling.

The Goldman Sachs investment-grade hyperscaler basket widened by 17 basis points that week, "the worst single-week performance since July"; the 30-year hyperscaler basket is 85 basis points more expensive than the IG100 (excluding hyperscalers), and has widened by a cumulative 90 basis points since the basket was created in February. In other words, the market is charging the world's largest and richest technology companies a premium close to junk-grade levels to finance their 30-year data centers.

The damage at the positioning level is equally brutal. According to Goldman Sachs prime brokerage data, Thursday saw the largest long selling in more than a year, hedge funds were in a deleveraging state on seven of the past eight trading days, and the information technology sector saw its largest net selling since September 2024. The Goldman Sachs Hedge Fund VIP pair basket had its worst single-week performance in 15 years, falling 4.1% over five trading days; the high-momentum basket has given back all of its year-to-date gains, with a drawdown of 43%. The Goldman Sachs TMT AI vs. AI risk basket fell 10% on Thursday alone, its worst single-day performance since the DeepSeek shock; the basket was up as much as 94% year-to-date in June and has now turned to a 13% decline for the year.

The Goldman Sachs EMEA distressed debt team described deeper market fractures in its weekly report: CCC spreads widened by 55 to 65 basis points that week to 1,320 to 1,340 basis points, down 3.5% month-to-date; global investment-grade spreads widened to a 17-month high of 129 basis points; only 10.1% of the loan market is trading above par, with 74.1% between 90 and 100, "leaving extremely limited buffer against further spread widening"; the primary market is "essentially closed, opportunistic issuance shelved, deals delayed, and some marginal deals withdrawn."

Speaking about the continued decline in Virgin Media bonds, the team said directly, "We have received a large number of inquiries about the reasons for the decline, but at this point, apart from technical factors, we are unable to offer an explanation."

European sovereign risk adds fuel to the fire

The spread between French 10-year government bonds and German bunds widened to 178 basis points, the widest level since the 2011 European debt crisis; the yield on French 10-year government bonds broke through 5% for the first time since 2002. French bank subordinated debt widened by about 25 to 30 basis points that week, and the European high-yield credit index Xover widened by 23.875 basis points.

The Goldman Sachs EU macro credit team noted a worrying signal: credit performance has begun to underperform rates, "for what feels like the first time in a long time." More concerning, during the spread widening, the sellers who typically sell primary protection "simply did not show up" this time, meaning the market is evolving toward a "rising dispersion" regime—no one is willing to underwrite risk.

Long-short battle: Can a reversal come by year-end?

Faced with this situation, the long-short divergence within Goldman Sachs persists, but the language on both sides has become more cautious.

Pasquariello acknowledged that the market last week "really cut to the bone," with Thursday's selling in technology exposure the largest in the past two years, and said he is "licking his wounds" and that "swimming close to shore is perfectly fine right now." But he also noted that Goldman Sachs still expects S&P 500 earnings per share to grow 18% in 2027, and that "with double-digit earnings growth, bear markets are extremely rare."

Shelofsky admitted that he "fell into the mean-reversion trap too early," having originally expected Meta's bond issuance to create room for a fourth-quarter rebound, but concerns about financing pressure instead intensified further last week. He still expects a short squeeze similar to July's at some point in the fourth quarter, but only if Meta's and SpaceX's chip deals close smoothly, and warned that year-end sentiment poses an additional headwind: "Compared with July, the trickiest part of this round is that, with year-end performance under pressure, the market broadly wants to deleverage... participants are all looking to scale down, lock in full-year results, and finish the year defensively."

Next week, the market will see $3 billion to $3.5 billion in investment-grade primary supply, as well as earnings from Google, Amazon, and Microsoft and Oracle's investor day, with "an extremely wide range of outcomes."

As Goldman Sachs' own data shows: credit strategists say spreads will exceed the downside scenario; the investment-grade trading desk says hyperscaler bonds just had their worst week since July, with 30-year bonds 85 basis points more expensive than the rest of investment grade; the distressed debt team sees CCC spreads approaching 1,330 basis points, the primary market essentially closed, and hedge funds suffering their largest single-day drawdown since COVID; the France-Germany spread is the widest since 2011; and yet the year-end spread target remains tighter than today—because of "December." Risk disclosure and disclaimer

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