Significant Step for Crisis Dynamics
Doug Nolan
Adding 0.7%, the Nasdaq100 closed the week at an all-time high (up 22% y-t-d).
While below June’s record high, the Semiconductor Index’s 3.7% weekly rise pushed 2026 gains to 85.5%.
The MAG7 index traded only slightly below the September 21st all-time high in early Friday trading.
Surely few appreciate ramifications for a problematic global financial crisis that took hold this week.
September 28 – Bloomberg (Amy Thomson):
“Nvidia Corp., the chip developer at the heart of the artificial intelligence boom, increased the size of its share buyback plan by $150 billion, increasing the total remaining amount authorized to $235 billion.
Nvidia will complete the buyback through fiscal 2028, the… company said…
‘Nvidia’s growth is being driven by a once-in-a-generation platform shift to AI and accelerated computing,’ Huang said...
‘This authorization reflects our confidence in the long-term opportunity ahead.’”
I would suggest managing against overconfidence, starting by forgoing buybacks to fortify Nvidia’s balance sheet for trouble on the horizon.
To be sure, trader (especially levered ones) prayers were answered with a timely U.S. jobs report much below forecast.
At the cusp of disorderly escalation, de-risking/deleveraging dynamics recoiled (somewhat).
It was one of those “holy crap” moments: About 30 minutes before the U.S. payrolls data release, French 10-year yields surged to 4.99% - up seven bps on the session to the highest yield since July 2002.
While not itself earthshattering, German bund yields were simultaneously down 10 bps to 3.41%.
This equated to a quick 17 bps widening in the key France/Germany 10-year yield spread to 158 bps - the widest level since peak 2011 European debt crisis instability.
This spread started September at 85 bps, after ending 2025 at 71 bps.
October 2 – Bloomberg (Georgia Hall and Alice Atkins):
“Hedge funds caught on the wrong side of this week’s slump in French bonds were forced to unwind bets rapidly, fueling wild moves that European markets struggled to absorb.
Taula Capital Management UK LLP, Balyasny Asset Management LP and other firms had piled into carry trades to profit from the difference between interest-rate swaps and French yields…
Those positions had been highly lucrative until recently…
Concern about France’s budget deficit and rising debt burden are not new, but the buildup of fast money and the increased concentration of risk can amplify swings when markets are stressed.
‘We have a very big community now in France of hedge funds in a way that does not help because that creates more pressure,’ said Marion Le Morhedec, CIO for fixed income at Fidelity International.
‘If you look at the flow, hedge fund activity accounts for probably 50% of what’s happening on the spread at the moment.
If you look at Eurex data, it shows you how hectic those players have been over the past few sessions and that puts pressure on governments,’ she added.”
Despite chronic political dysfunction and outstanding debt having exploded to 119% of GDP, higher yielding French debt was considered an alluring (huge, liquid sovereign debt market) target for levered “carry trade” speculation (i.e. short German bunds/Swiss bonds to finance levered holdings in higher-yielding French debt).
A major one indeed, but only a single example of the type of manic excess that evolved to permeate global leveraged finance.
Important in the context of a “global crisis,” instability was anything but contained within the French “oats” market.
Disorderly Friday trading saw Italian 10-year yields jump to a three-year high of 4.71%, with the spread to German bunds blowing out to 131 bps – up 40 bps from last Friday’s 91 bps close, to the widest level in two years. Greek spreads widened to 117 bps, up from last Friday’s 80 bps close.
Panicky.
Policymakers, as they habitually do, will of course respond to this deleveraging episode.
How is not obvious.
Planning her future beyond the ECB, don’t count on a “bumble bee” revisited speech from France’s own Christine Lagarde.
Besides, Mario Draghi’s 2012 “do whatever it takes… and believe me, it will be enough” has run roughshod throughout global finance for the past 14 years.
Since the 2012 European debt crisis, French debt-to-GDP has skyrocketed from 85% to almost 120%.
In jeopardy in 2012, the euro is fortunate to have degenerate competitors.
With Greece and Italy at the epicenter, previous crisis dynamics were fueled by a crisis of confidence at the euro’s “periphery.”
A relative stable “core” coupled with egregious monetary inflation resuscitated Credit Bubble dynamics.
With an unfolding crisis of confidence in French debt, intensifying euroland instability will not be easily managed.
Risks are high of already elevated inflation becoming only more problematic.
Meanwhile, the bloated ECB balance sheet is sitting on massive and growing losses.
It’s certainly worth noting that the euro declined 1.2% this week (down 4.18% y-t-d).
And as bond spreads were blowing out Friday in pre-jobs report trading, the euro declined to a 16-month low of 1.122.
When pondering the “big one,” I’ve long feared that a crisis of confidence in the euro currency could be an important facet of a highly destabilizing global financial crisis.
Much depends on the sequencing of speculative deleveraging and faltering Bubbles globally.
Troubling pre-jobs report trading dynamics were not confined to Europe.
Some key EM currencies (i.e. Mexican peso, Chilean peso, South African rand) were simultaneously under pressure, only to reverse on weak payrolls.
Fragile EM bonds were similarly under pressure, with notably unimpressive post-data rallies.
Deleveraging Contagion.
The unwind of European and EM “carry trades” and Treasury “basis trades” now feeds on one another.
Deleveraging has commenced liquidity destruction across global debt markets.
Moreover, euro weakness bolsters the U.S. dollar at the expense of faltering EM currencies and debt markets (“carry trades”).
Notable EM currency losses this week include the Chilean peso (2.84%), Mexican peso (2.65%), the Romanian leu (2.36%), South African rand (2.08%), Hungarian forint (2.05%), the Czech koruna (1.45%), and Polish zloty (1.43%).
Painful three-week drops include the Mexican peso (6.59%), Colombian peso (5.54%), Chilean peso (4.82%), Romanian leu (4.45%), Polish zloty (4.26%), and Hungarian forint (4.26%).
The iShares Emerging Market bond ETF declined another 1.73% this week, with an eight-session loss of 3.33% (largest since the start of the war).
Indicative of deleveraging, dollar-denominated EM bonds were again in the crosshairs this week.
Colombian ($) 10-year yields surged 36 bps to a 15-month high of 7.85% - with yields up 70 bps in three weeks.
Up 17 bps this week (7.12%), Mexican ($) yields broke above 7% for the first time in at least 16 years.
Brazil’s ($) yields rose 15 bps to 6.73%, with yields up 16 bps in Panama (6.53%), 16 bps in Peru (6.20%), and 14 bps in Chile (5.99%). Philippine ($) yields surged 22 bps to 6.25%, while Indonesian ($) yields jumped 19 bps to 6.23% - both trading this week to highs back to 2010 (at least).
Local currency yields surged 37 bps in Colombia (13.18%) and 19 bps in Brazil (14.06%).
EM CDS jumped 16 bps this week to the high (167bps) since early April – with a notable two-week rise of 27 bps.
Over the years, I’ve shared key Bubble analysis: Bubbles fueled by high-risk debt, while often spectacular, typically do not pose extreme systemic danger.
Risk aversion will take hold (“no more junk!”) before years of excess cultivate deep structural damage.
It is Bubbles inflated by expanding “money” – and money-like debt instruments more specifically – that should be most feared and safeguarded against.
Insatiable demand for perceived safe and liquid debt ensures the potential for devastatingly protracted structural maladjustment.
This analysis needs to be further developed to better illuminate today’s perilous Bubble backdrop.
The global government finance Bubble has been chiefly fueled by “money” – historic inflations of sovereign debt and central bank Credit.
Importantly, leveraged speculation has been instrumental in perpetuating the perception of safety in the face of reckless over-issuance.
On the one hand, the leveraged speculating community’s accumulation of Trillions of Treasuries, agency securities, and global government debt sustained artificially low yields.
“Deficits don’t matter.”
Central banks will ensure liquid and orderly government bond markets.
On the other hand, the global proliferation of “terminal phase” global “basis” and “carry trades” fomented historic liquidity abundance, along with the perception of ongoing limitless marketplace liquidity.
Never has the world experienced such monumental market distortions.
And especially in the U.S., massive deficit spending inflated incomes, corporate earnings, stock prices, and perceived wealth.
It is in this extraordinary environment that the historic (late super-cycle crazy) AI arms race and debt Bubble were unleashed.
Importantly, the market for years deferred the “no more risky junk!” revolt.
Instead, it became pretend time, with markets conceiving high quality, even as the underlying AI debt expansion ramped up to hundreds of billions of increasingly risky debt.
Systemic risk expanded exponentially.
Well, market protests have now begun in earnest.
It might not yet be “no more AI-related debt!” – but it increasingly requires an active imagination to envisage the smooth financing of Trillions of AI spending required over the next few years.
Worse yet, the revulsion to AI Credit unfolds concurrently with a mounting crisis of confidence in government debt - disorientation associated with a double-shot of unforeseen risk recognition and moneyness deterioration.
Belatedly, debt from major profligate borrowers – including France, the UK, US, Italy, Greece, Japan, and others - confronts the revelation of the fallacy of moneyness.
In particular, the unwind of levered holdings now exposes the risk of spiking yields (sinking prices), illiquidity, and disorderly markets.
And this harsh new reality dramatically alters the risk versus reward calculus for high leverage, setting in motion a problematic “doom loop” of deleveraging and liquidity challenged global markets.
Throughout history, finance has proven remarkably proficient at conveying the notion of a “free lunch.”
And this perception of costless meals can persist for years - on rare occasions even decades.
Food addictions develop gradually, then the humongous (overdue) bills show up suddenly.
Returning to the markets, stress had been building throughout the week.
Right out of the blocks, high yield CDS prices surged 22 bps Monday – the largest daily gain since March 27th.
Oracle (’36) yields jumped 15 bps Monday to a record 7.49% - pushing to four-session rise to 47 bps.
At Friday’s intraday highs, CoreWeave (’32) yields had surged 62 bps on the week to 12.60% (closed the session at 12.29%).
Meta (’36) yields rose another 10 bps this week to a record 6.23% (4-session jump 36bps).
This week’s 28 bps surge in high yield CDS prices was the largest since March – trading to highs since April.
High yield spreads widened another 12 bps to 3.06 percentage points (six-month high of 3.18 on Thursday), with the 39 bps two-week widening the largest since “liberation day” instability.
Investment-grade CDS increased two, with a 10 bps two-week gain to the high (60.3) since April 4th.
Leveraged loan prices reversed lower, falling 22 cents to a two-month low of 95.27.
October 1 – Bloomberg (Brian Smith, Caleb Mutua and Gowri Gurumurthy):
“Just hours after Paramount Skydance Corp. issued $52 billion of debt to fund the biggest Hollywood buyout ever, investors were nursing more than $100 million of losses, triggering a flurry of angry calls from money managers to Wall Street banks that underwrote the debt.
The company’s junk bonds were among the hardest hit in initial trading, with the eight-year US dollar notes changing hands at about 96 cents on the dollar on Thursday after selling for 100 cents on Wednesday.
The loans and high-grade bonds broadly weakened as well, and the cost of betting against the company’s credit surged to a 17-year high.”
The debt found (willing?) buyers, but it was not cheap.
The marketplace is not oblivious to risks associated with much higher-than-expected debt servicing costs.
Paramount CDS surged 160 bps in 10 sessions to a record 430 bps.
This monster deal certainly embodies this most profligate of eras.
It also foreshadows trouble brewing for levered finance more generally.
Speaking of profligacy and levered finance, 10-year Treasury yields jumped another 11 bps this week to 5.27% - the high back to June 2007 (within 2bps of highs back to 2002).
Thirty-year yields rose 13 bps to 5.62% - the high since June 2002.
Worth noting that two-year Treasury yields dipped three bps this week, with yields dropping five bps in Tuesday trading.
Interestingly, market probability for an October rate hike dropped to 47% on Tuesday (from Monday’s 70%), before ending the week down to 23%.
Some dovish Fed comments (Williams, Jefferson, Bowman) didn’t hurt.
But mostly, the rates market responded to heightened odds of market instability grounding the FOMC’s hawkish contingent.
Meanwhile, deleveraging drives long duration yields higher.
Benchmark MBS yields surged 15 bps to 6.43%, with a 38 bps spike over the past eight sessions.
Curiously, 10-year Treasury yields dropped to 5.15% on weak payroll data, only to reverse higher to close the session 12 bps off the lows.
The forces of deleveraging have turned powerful.
Global crisis dynamics took a significant step this week.
For Posterity: AI Debt Revulsion Watch:
September 30 – Reuters (Gertrude Chavez-Dreyfuss):
“The artificial intelligence boom has arrived in the riskiest corners of US credit markets, where leery lenders are demanding more compensation to fund borrowers whose future earnings remain largely unproven.
AI-related issuance by low-rated firms has totaled $88 billion this year, according to Goldman Sachs, with most… from US issuers.
In the first 11 months of 2025, AI-related issuance in leveraged finance — mostly via junk bonds and loans — was just $20 billion, analysts said…
Now investors are taking a harder look at these less-established borrowers — questioning their revenue projections, the value of their collateral and how much debt they can realistically support.
This comes at a time when higher-rated AI issuers have been on a borrowing spree and a selloff in Treasury markets is pushing yields up across the board.
‘High yield people like to know how much cash flow is coming, when that cash flow is coming, and what is the probability that the cash flow doesn’t come,’ said Larry Holzenthaler, senior portfolio manager… at Catalyst Funds.”
October 2 – Axios (Jim VandeHei and Mike Allen):
“No industry has ever documented its own foreseeable risks as loudly as AI.
Imagine a plaintiff’s lawyer reading the public warnings of Sam Altman and Dario Amodei: They told the world it was dangerous.
They told the world it was moving too fast.
Then they unleashed it and sold it to your kid.
No industry has ever taken so much copyrighted work and left behind so much proof.
Imagine a plaintiff's lawyer reading OpenAI’s own files to a jury: They trained on a pirated library.
They renamed it to something blander.
Then they deleted it when the headlines got hot.
AI’s origins, use and future will be picked apart in countless epic court fights, with a historic paper and public statement trail to tap.
Every significant invention — be it social media, automobiles, electricity or capitalism itself — gets disrupted and eventually shaped by the courts.
AI, with its tentacles into every part of industry and life, will experience this at scale.”
September 29 – Axios (Avery Lotz):
“A public interest law group hit OpenAI with a lawsuit… over its breach of tech company Hugging Face, seeking court-ordered restrictions to prevent future hacks.
The rogue hacking incident — and reports of tens of thousands of other possible examples of problematic agentic behavior — demonstrated the urgent risk of AI agents escaping their testing environments, bypassing guardrails and outpacing their creators.
The case tests an increasingly urgent question as AI agents gain power: Who bears legal responsibility when an agent blows past its guardrails and causes real-world harm?”
September 29 – Reuters (Echo Wang and Jody Godoy):
“Anthropic could face legal claims from customers and users over the actions of rogue artificial intelligence agents, though the legal framework is uncertain, the company said in the prospectus for its stock market debut...
While it gears up for what could be the largest initial public offering ever, Anthropic faces the possibility of vast unknown legal risk if its agentic AI technology -- designed to maintain deep access to customers' systems and run autonomously for days at a time -- goes rogue.
‘These autonomous capabilities could increase the potential for harm, as errors, misalignment, or security exploits may result in real-world consequences,’ the company said in the documents, citing the possibility of irreversible actions such as data deletion or financial transactions.”
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