CapEx demands

Another day, another headline of possible peace deal with Iran, but as usual, with strings attached. Which means no deal. In the domestic front, things are moving in credit markets with the hyperscalers. The CapEx demand is becoming so big that by the end of the year, almost all the operating cash flow from these companies will go to AI related investments (bottom chart). That means they will continue to tap the bond market, and investors are starting to price that in. In the top chart below you can see that spreads from hyperscalers bonds are trading away from their current ratings(AAish) and behavior g more closely to A rated bonds. They are getting squeezed by the investment needs, the low ROIs and the fast depreciation of those investments which are becoming obsolete or subpar pretty quickly. That’s why we are seeing most companies easing capital, because bond investors are demanding more cushion underneath their bonds to keep supporting the CapEx demands. This competition is so fierce that we may see only one winner or two, and the big question is how many feathers they will lose on the fight. The bond market is starting to separate the losers from the winning herd.

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