Can Bonds Still Do Their Job?

CoreWeave

Across the shows: 40 speakers in other episodes, 10 bullish and 31 bearish calls, past 30 days

• Liz Ann Sonders · Charles SchwabBearish

  CoreWeave, a leading neocloud, is among the most rate-sensitive AI names, funded with short-fuse debt.

  CoreWeave is named as the 'poster child' for concerns about AI spending. Neoclouds rent out GPU compute, mostly from NVIDIA, to AI developers and sell essentially one service, unlike hyperscalers. Sonders argues neoclouds are arguably the most rate-sensitive corner of AI because they are long-duration growth companies funded with short-fuse debt. That mismatch leaves them highly exposed in a rising-rate environment, and that sensitivity is why CoreWeave-type names are in focus. She notes she is not an analyst and uses CoreWeave as a proxy for the broader AI spending debate.

  “And the neo clouds are arguably the most rate sensitive corner of AI because they are... They're long duration growth companies, but they're funded with sort of short fuse debt, and there's just heightened sensitivity in a rising rate environment.”at 9:48

• Collin Martin · Charles SchwabBearish

  CoreWeave's junk rating points to elevated credit risk and rate sensitivity, though Martin does not cover it.

  Martin says CoreWeave is a junk-rated issuer, rated double B or below. Such issuers usually already have high leverage and may have volatile cash flows. Low ratings usually come with more volatility and greater sensitivity to rising rates, which is the current environment. He stresses he is not a bond analyst on this issuer and is speaking objectively about the rating category, so the view is a risk warning rather than a firm call.

  “and with low ratings come usually more volatility. They might be more sensitive to rising interest rates, which is the environment we're seeing right now.”at 13:09

US Treasuries & yields

• Collin Martin · Charles Schwab

  Bonds did their job last week, rallying as stocks dipped and showing their diversification value.

  Martin points to last week's price action. Yields fell and bond values rose as the stock market declined a little. Bond prices and yields move in opposite directions, so the rally showed the price stability, capital preservation and diversification benefits bonds are supposed to provide. He notes stocks were still near all-time highs, so the decline was modest. He treats this as a calming signal for investors worried about bonds and stocks falling together.

  “arguably, bonds did exactly what they're supposed to do, in that yields fell, their values rose because bond prices and yields move in opposite directions as the stock market declined a little bit.”at 3:15

• Liz Ann Sonders · Charles Schwab

  Stock-bond correlation remains negative, so bond and stock prices are moving in the same direction.

  Sonders measures the correlation between the 10-year yield and the S&P 500 over rolling one-month, three-month and one-year windows. The reading is still in negative territory, which means bond prices and stock prices are moving in the same direction. This is why investors question whether bonds still diversify equities. She adds that bond income and return of principal at maturity still matter even when prices are under pressure.

  “I look at rolling one month, rolling three month, rolling one year, you name it, correlation between the ten year yield and the S and P 500. And that is still in negative territory.”at 4:28

• Collin Martin · Charles Schwab

  Current Treasury and aggregate-bond yields are attractive, and income is the core source of bond returns.

  Martin argues that even if yields hold in a tight range for a long time, bonds still generate income, which is the core value of bond investments. A strategy offering around a 5% yield can deliver steady returns if values hold steady. He says the current level of yields is very attractive, so the focus should be on income payments. He hedges that fluctuations can happen and that this is not a prediction of any specific outcome.

  “we're at a level right now where yields we think are very attractive and focus on those income payments.”at 6:48

AI infrastructure & data centers

• Liz Ann Sonders · Charles Schwab

  Debt financing of the AI build-out is a rising risk because long-duration investments meet fast-changing narratives.

  Sonders argues that leverage and the debt financing increasingly needed for the AI build-out are the key concern, more than the spending itself. Leverage is financing the timeline from investment to payoff. Many AI investments have long durations, yet news flow and narratives in the space change rapidly. That gap between a long payoff horizon and fast-moving sentiment is why attention has moved to the debt side. She also contrasts the cost of capital with the return on invested capital as a central question for the CapEx spend.

  “The timeline meaning from when the investment is made to when it bears fruit. And one of the problems in the world of AI is that a lot of these investments have a relatively long duration associated with them, yet news flow and narratives are changing in rapid fire fashion in this space.”at 9:17

• Collin Martin · Charles Schwab

  Hyperscalers' heavy bond issuance is manageable, since their debt relative to earnings is not concerning.

  Martin argues that credit risk must be assessed issuer by issuer, not with a broad brush. Hyperscalers are investment-grade issuers with diversified business lines. Their debt relative to earnings is not at concerning levels, even though they have issued a large amount of debt to fund AI spending. This contrasts with sub-investment-grade neoclouds, which carry more leverage and volatility.

  “for a lot of the so called hyperscalers, those are investment grade issuers that have diversified business lines and their debt relative to their earnings aren't really at concerning levels even though they've issued so much.”at 13:25

US stock market outlook

• Liz Ann Sonders · Charles Schwab

  Market leadership now favors profitable small caps over unprofitable ones, reversing last year's pattern.

  Sonders looks below the cap-weighted index level at factors. Within the Russell 2000, profitable stocks are outperforming unprofitable ones by 18 percentage points. Last year, the reverse was true, with unprofitable stocks returning twice as much as profitable ones. She reads this as a hunt for quality in an environment of rising concern over earnings estimates, margin stability, CapEx spending and how that spending is financed. Her point is that the broad index hides these winners and losers.

  “...the profitable Russell two thousand stocks are outperforming the nonprofitable Russell two thousand stocks by 18 percentage points.”at 10:50

US housing

• Collin Martin · Charles Schwab

  Mortgage rates jumped sharply on top of already elevated levels, which will likely weigh on housing data.

  Martin says mortgage rates were already elevated relative to the past fifteen years. They picked up recently and then rose sharply. He expects that move to flow through to the housing data coming out in the weeks ahead. Liz Ann Sonders also flagged home sales as something to watch because of the rise in mortgage rates. The view is that housing activity will be pressured by the rate move.

  “We've seen this big jump in mortgage rates. So mortgage rates had already kind of been elevated... They picked up a little bit recently, then they kind of turbocharged even higher.”at 15:16

US inflation

• Collin Martin · Charles Schwab

  Core PCE is expected to rise 0.3% month over month, which Martin sees as too hot for the Fed.

  Martin says the PCE report is the key inflation measure for Fed policy and that core monthly readings are the focus. Expectations are for core PCE to rise 0.3% month over month, which he thinks is a little too hot for officials. He also watches the diffusion index, the share of subcomponents rising at a 3% annualized rate, to see whether inflation is broadening. Upside surprises or breadth that does not improve would raise the odds of more rate hikes.

  “Expectations right now are for core PCE to rise by 0.3% month over month. That'll be a little bit too hot, I think, for officials.”at 17:42

US rates & the Fed

• Collin Martin · Charles Schwab

  Fed holds next week, but Martin expects hikes by December and another in early 2027.

  Martin expects a pause at the upcoming FOMC meeting, with the policy rate in the 3.75% to 4% area. He still expects a hike by year-end in December and another in early 2027. The reasoning is that inflation has not cooled, the outlook has not improved, and the Fed hiked last month. He expects a few hawkish voters to dissent in favor of a hike. If upside inflation surprises continue, or breadth in price increases stays elevated, the likelihood of more hikes should be high.

  “So even though we expect a pause next week, we do expect a hike by year end in December and then another one sometime in early twenty twenty seven.”at 18:13

US growth & recession risk

• Liz Ann Sonders · Charles Schwab

  AI build-out imports offset booming business capex in GDP, since net exports subtract from growth.

  Sonders expects the import-export relationship to matter for the upcoming GDP release. Much of what is being bought for the AI build-out is imported. Imports do not add to GDP because they show up as a net exports reading. Business capex numbers are booming, but imports offset part of that gain. Business capex is captured by nonresidential fixed investment, and the import drag keeps the headline growth contribution smaller than the capex surge implies.

  “a lot of what is being purchased for the build out in AI are imports. That does not accrue to the benefit of GDP because it's a net exports reading.”at 18:56