Private credit's bad loans tripled; its shares went up anyway

Archived reading, published Sat, 29 Aug 2026 02:19:35 UTC (24 days ago). This is not the current state of the meter.

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CRASH-O-METER

Cracking

how close are we

+1 since the last reading

Fragility89

how much tinder is stacked up — moves slowly

Ignition37

how close a spark is — moves fast

Crash Lab watches the machinery under the current boom: the debt paying for AI data centres, private credit, the leverage that has moved out of banks into places nobody has to mark, the bond market and the dollar.

Every four hours it reads the day’s reporting from 33 sources and rewrites this page.

Why it moved: Up one to 63. Fragility goes to 89 as a measurement correction on private credit: loans that have stopped paying at the ten largest funds that lend to mid-sized private companies are 3.95% of their books at cost (5.95% if you count every slice of any borrower with one impaired loan). Blackstone Secured Lending has gone from 0.3% to 3.6% in five quarters, and interest paid by adding to the debt rather than handing over cash now accounts for roughly 10% of these funds' loans, worse than the estimate we have been carrying. Ignition goes to 37 because three funding channels actually closed rather than merely wobbled: an A$3.5bn Australian developer funded by retail private credit collapsed, investor requests to pull money out of these funds hit a record 12.4% of net asset value, and Ares had to cut a €1bn continuation fund to about €400m when buyers disputed the valuations. The broader market itself is unchanged from last run: the VIX, the market's gauge of how much turbulence traders expect over the next month, sits at 14.43 (under 20 is calm). The extra interest that shaky borrowers pay compared with the government is 2.63 percentage points for the riskiest corporate debt and 0.79 percentage points for companies considered safe.

Reporting from 27 Aug to 28 Aug

Crash points

Eight places it could go, scored 0–10. Tap one for the explainer.

What’s moving the needle

What changed in the last few hours, and what each one says about the plumbing.

Private credit and BDCs28 Augmedium

Loans that stopped paying tripled; the funds rallied anyway

The whole case for private credit is that its losses stay small and its valuations stay honest. The first half of that claim is now visibly failing while the share prices behave as though it is not.

The second-quarter 2026 numbers are now in, and they are the worst of this cycle. A note from Jefferies, the investment bank, summarized in market coverage, puts the share of loans that have stopped paying interest at Ares Capital at 2.4%, Blue Owl at 2.8%, Golub at 2.9%, and Blackstone Secured Lending at 3.6%. In the first quarter of 2025 those figures were 1.5%, 1.4%, 1.2%, and 0.3%. Across the ten largest listed funds that borrow money, lend it to mid-sized private companies, and pass the interest to shareholders, loans that have stopped paying are 3.95% of debt portfolios at cost, or 5.95% if you count every slice of any borrower with one impaired loan: $3.3bn of an $83.6bn book, with $772m of interest income at risk. When a lender stops counting the interest on a loan because it has stopped arriving, that is an admission it no longer expects to be paid. That matters more here than at a bank, because these funds pay their dividends out of the interest they collect. Two things cushion the gap. One is interest paid by adding to the debt rather than handing over cash: a Boston Fed study cited in the same coverage has that practice rising from about 6% of these funds' loans in early 2022 to about 10% by early 2026. The other is that the loans are valued by the manager itself, not by a market. And the share prices say none of this is happening. Over twenty days FS KKR is up 15.9%, Blue Owl Asset Management 19.1%, Ares Capital 6.3%, Blackstone Secured Lending 7.1%. Every one of those is within about 5% of its recent high while the credit underneath deteriorates on a straight line. Either the stock market thinks 3.6% of loans going bad is the peak, or it is buying the fee stream and ignoring the book.

Private credit and BDCs28 Aughigh

An A$3.5bn builder funded by retirees just failed

It is the clearest live demonstration that private credit's risk is not just the risk of not getting paid back, but the risk of money being locked up in the hands of people who were sold a product for the interest it pays.

Bathla, a Sydney property developer with more than 520 subsidiaries, about 2,000 homes under construction, and roughly 13,000 more in the pipeline, has gone into administration owing creditors more than A$3.5bn. Administrators at Teneo put the figure at about A$3.3bn excluding the deposits paid by thousands of apartment buyers, and warned the company would burn A$40m before year-end if it kept building. The interesting part is who lent the money. According to the ABC, the bulk of it came not from banks but from private credit funds, money raised from self-funded retirees and other retail investors and lent on to property developers. Australia's version of the asset class has attracted close to A$250bn. ASIC, the agency that polices Australian markets, ordered a deep dive into the sector last year covering asset valuations, fee transparency, and conflict management. It has now described what it is seeing as the "first significant cracks," citing the collapse of several large borrowers and limited redemptions at several major funds hitting liquidity constraints. This is the mechanism Crash Lab keeps pointing at, running in a smaller and therefore faster market. A construction loan cannot be sold in a day. A retail fund that offers monthly or quarterly withdrawals against a book of construction loans is making a promise it may not be able to keep: it owes investors cash on demand, but its assets cannot be turned into cash on demand. There is no government backstop behind it. When one borrower of this size fails, the loss is not the only problem. The line of investors asking for their money back forces the fund to sell whatever it can sell, which is never the loan that went bad. Australia is not the United States and A$3.5bn is not large enough to threaten any financial system. But it is the first sizable test in this cycle of retail-funded direct lending against assets that cannot be sold quickly, and it did not hold.

Hidden leverage and shadow banking28 Aughigh

The market maker and the fund it seeded owned the same trade

Hidden concentration is the defining feature of borrowed money you cannot see, and here the concentration ran through one of the largest trading firms in the world rather than around it.

The Financial Times has filled in how Jane Street, one of the biggest market-making firms in the world, lost money over a month for the first time in a decade. The firm had invested heavily in Situational Awareness, the AI-focused hedge fund run by 24-year-old Leopold Aschenbrenner. A former Jane Street employee works there. And Jane Street was itself exposed to many of the same AI-linked stocks the fund had bought, including Sandisk, Nebius, and Bloom Energy. When those positions turned in July, the stake and the direct positions moved together. The result was a $15bn hit to trading revenues, and a letter to employees conceding the firm was not protected against some of the moves. The important point is about correlation, not size. A market maker's traditional risk is the inventory it holds for seconds. Jane Street, as Bloomberg Intelligence's Larry Tabb puts it, has extended both holding period and size: "The longer your holding period, the more chance that something you can't forecast occurs." Investing in a fund that owns the same stocks you own is the opposite of protection. It is the same bet, twice, with the second copy financed by someone else. That someone else is now being asked questions. Market commentary reports that on August 24 the SEC, the agency that polices American markets, sent subpoenas to Bank of America, Citi, Goldman Sachs, and JPMorgan in the Situational Awareness matter, seeking information on the fund's trades and its use of borrowed money after demands for more cash from its lenders and a portfolio hit of roughly 67%. In an ordinary bad quarter a fund might lose 10 or 15%. Losing two thirds of your money in a month is not a bad quarter. Nothing broke. The loss was absorbed seven weeks ago without a crisis in the firm's funding, which is genuine evidence of resilience. What it establishes is that the banks that lend to trading firms financed a concentrated AI-stock position at a firm that is itself one of the largest financial institutions in the US, and nobody outside the chain could see the overlap.

The AI capex bubble28 Augmedium

The chips are the collateral, the tenant is the credit

If debt secured by AI chips is really a bet on the tenant paying rent, then a single large customer walking away from a contract reprices an entire financing complex at once.

The pipeline this week, all of it secured or structured: Nebius upsized its raise to $5bn ($3bn of private convertibles due 2030 and $2bn due 2034) toward as much as $25bn of spending on building things this year, and has begun pledging its infrastructure and customer contracts as security, having already taken a $775m loan in July backed by existing AI chips and cash flows from a customer rated safe by the agencies that grade borrowers. Applied Digital is gauging interest in roughly $3.5bn of bonds from a company too shaky to be considered safe, for its Delta Forge 1 campus in Louisiana. Goldman is sounding out $800m for two Novva campuses in Nevada, and is expected to lead $1.085bn of secured notes for Digital Drive's CoreWeave-leased campus, issued through a separate company set up to hold the debt off the parent's books, affiliated with PowerHouse Data Centers and Chirisa Technology Parks. More than $410bn has been borrowed this year for data centers and AI. The structure is consistent enough to name. The borrower has very little of its own money in the deal. The security pledged to lenders is either an AI chip, which loses value over time and has a resale market nobody has stress-tested at scale, or a building, which is only worth the lease. The actual creditworthiness being underwritten in almost every case is the tenant (Microsoft, CoreWeave, an unnamed customer rated safe) and that obligation does not appear on the tenant's books as debt. The stock market is pricing this distinction with some precision. Microsoft closed Friday at its period high, exactly 0% off. The people borrowing against it did not: Applied Digital fell 7.6% on the day and sits 18.9% below its high, IREN fell 12.6%, Core Scientific is down 20.1% over twenty days and 31.1% off its high, Nebius 24.7% off. The extra interest that the riskiest corporate borrowers pay compared with the government, meanwhile, tightened to 2.63 percentage points. Someone is wrong. The bond market is lending into this at rates that imply almost nothing goes wrong. The stock market is marking the borrowers down a fifth to a third.

Fed, Treasury and policy28 Aughigh

Regulators raise the bar for telling a bank off

The intensity of bank supervision is falling at the same moment banks' largest growth area is lending to the funds and structures that took the risk off their books.

The OCC, the regulator that supervises national banks, and the FDIC, which insures bank deposits, announced new supervision rules on Thursday centered on "refocusing supervision on what matters most — material financial risk." The overhaul writes a new definition of "unsafe or unsound practice," a term previously left open to interpretation, and sets a higher bar for issuing Matters Requiring Attention, the formal notices examiners send when they want something fixed. The agencies say they are removing "Biden-era distractions" that turned examinations into a check-the-box exercise, and the OCC will publish its policies and procedures manual for the first time. The rationale is not silly. The reference case, cited by a regulator involved in the action, is Silicon Valley Bank: the Federal Reserve, America's central bank, had issued several notices about governance, controls, and anti-money-laundering, and none about the interest-rate and liquidity risk that actually killed it. The notices "should have been about the actual risks to the bank rather than a random assortment." Under the new rules the agencies would stop issuing notices for minor infractions such as breaches of the IT handbook. The question is what "material financial risk" is judged to include. These formal notices are the pre-enforcement instrument, the thing that happens before a legal order, and often the only thing that happens. Raising the threshold means fewer early, cheap interventions and a greater reliance on examiners correctly identifying the one exposure that matters, in advance. That is precisely what did not happen at Silicon Valley Bank. The exposure worth watching is bank lending to non-banks: credit lines, warehouse facilities to private credit funds, and the chip-backed structures now being arranged by JPMorgan and Goldman. On any reading that is material financial risk. It is also, from a supervisor's chair, the hardest kind to see, because the bank's own loan looks senior and secured. The security pledged is somebody else's book.

Bond market dysfunction28 Aughigh

Three former Treasury officials call the buyback puzzling

Shortening the life of the national debt to hold down long-term interest rates converts a problem of being locked in at high rates into a problem of having to borrow again soon, exactly as the Federal Reserve considers raising rates.

The critique of the Treasury Department's buyback of government bonds that do not come due for twenty or thirty years has now come from inside the building. Treasury buybacks are not unusual in themselves. Doing one without warning, outside the regular schedule that was supposed to contain it, is. Nathan Sheets, Citi's global chief economist and a Treasury under secretary under Obama, told Nikkei: "I do not think there were any meaningful signs of illiquidity in the market, and it is not clear what bar was met that triggered the expansion of the buybacks at this time. It was an unusual action. I did not find it shocking, but I found it puzzling." He adds the obvious point that the biggest driver of long-term interest rates is fiscal policy and the volume of borrowing. Separately, in a New York Times op-ed, Geng Ngarmboonanant, now a JPMorgan managing director, formerly deputy chief of staff to Janet Yellen, notes that the doubling of buybacks to at least $28bn of long-term debt over two months came outside the regular quarterly process where the Treasury announces how it plans to borrow, which is where debt-management changes are normally made. Within 48 hours the ten-year rate was back above 4.70%, higher than before the announcement. What a buyback does is not reduce debt. It swaps bonds that do not come due for decades for short-term bills, shortening the average life of the national debt and taking risk off private investors' books. That works if the problem is a temporary shortage of buyers for long-term bonds. It is expensive if the problem is the deficit, because the government has quietly refinanced itself at the short end of the borrowing schedule just as the new Fed chair is telling markets that conditions are not tight enough and the odds of a September rate increase have gone above 50%. The long end is calm today: the ten-year rate at 4.67%, the thirty-year around 5.17%, the MOVE index (the same idea as the VIX but for government bonds rather than stocks) at 11.22, up nearly 25% in five days but still low by historical standards. The intervention is being read as insurance, not distress. The awkwardness is that once you defend a level, you own it.

Signs of the times

Stuff you wouldn’t have believed was possible until 2026.

Forced sale, then the wedding

Leopold Aschenbrenner, 24, was forced into a sale of his Situational Awareness fund's positions days before his August wedding. One of the guests was Rob Granieri, co-founder of Jane Street, which had invested heavily in the fund and held many of the same AI stocks. Jane Street booked a $15bn hit to trading revenues and its first losing month in a decade.

hedge fundsconcentration

28 AugFinancial Times

A bitcoin miner plans $30bn of spending

IREN, a Sydney-listed bitcoin miner turned AI landlord, forecast as much as $30bn of capital spending for the 2027 financial year, borrowed $2.4bn at 9% from Blue Owl and Pimco to buy Nvidia chips, and this year put its logo on the Golden State Warriors' jerseys. Its shares fell almost 13% on Friday.

ai capexgpu debt

28 AugBloomberg

A €1bn fund that could only sell €400m

Ares had to cut a proposed €1bn private credit continuation fund to about €400m after investors pushed back on the valuation of the loans being moved into it. Continuation funds are one of the few places where a private valuation meets an actual buyer, and this one did not clear at the asking price.

private creditmarks

28 AugAccelerate Shares

52.8 million Brazilians on revolving credit

Brazil's household debt-service ratio excluding mortgages hit a record 26.6% of income in June, and more than half of all credit card users, 52.8 million people, are carrying revolving balances or installment loans. The central bank is preparing curbs on lenders rather than the IMF's proposed cap on borrowers.

householdsemerging markets

28 AugReuters

The rumour mill

What the crash-callers are saying, checked against real reporting.

Partly true

“Nvidia wants to give OpenAI a $125bn guarantee.”

The number circulating is wrong in both directions. Reuters reported the announced guarantee at $105bn; the Wall Street Journal reported earlier talks at up to $250bn before Nvidia's exposure was revised to under $120bn in the Ohio data-center structure. There is no $125bn figure in the reputable coverage.

Claimed by Wealthion

Confirmed

“24.9% of America's workforce is functionally unemployed — jobless, involuntarily part-time, or earning under $26,000 a year.”

The figure is real and was 24.9% in July, up from 24.7%, but it is the Ludwig Institute's own True Rate of Unemployment, not an official statistic. It counts full-time workers earning poverty wages as unemployed, which is a definitional choice, not a data revision.

Claimed by Michael Bordenaro

Partly true

“The Treasury is intervening to suppress long-term yields and markets are positioned for dollar debasement.”

The doubling of buybacks to at least $4bn per operation across the ten- to thirty-year sector is confirmed and openly announced, and Reuters reported fears of currency debasement and financial repression in response. But an announced buyback program is not a covert suppression campaign, and gold fell 3.8% over five days as that trade partly unwound.

Claimed by Gregory Mannarino

Earlier developments

Dispatches from previous readings. The same argument, no longer the news.

Private credit and BDCs28 Aughigh

Direct lending against chips, not cash flows

Private credit is moving from lending against businesses to lending against hardware, on loans that come due before the hardware has paid for itself.

Blue Owl funds, with Pimco alongside, have led a $2.4bn debt deal for IREN, split between a $1.2bn loan and $1.2bn of notes, both secured against the company's assets, both at 9%, both due two and a half years after the money arrives. The money buys Nvidia Blackwell Ultra graphics processors for IREN's Mackenzie campus in British Columbia. Blue Owl's Kurt Tenenbaum described it as "a combination of equipment financing for GPUs and a direct lending underwrite for Iren" and one of the largest of its kind (Bloomberg). This is a different animal from most private credit. A normal loan from one of these funds is secured against a company that earns money. This one is secured, in large part, against hardware whose resale value depends on whether the next generation of chips arrives early or late. Three things have to stay true for the lender to get paid back: IREN's contracted revenue shows up, the chips hold their value if it does not, and the borrower can borrow again to pay this off in early 2029. IREN told the market on Thursday it expects up to $30bn of spending on building things in the 2027 financial year. Its shares fell 12.6% on Friday and are down 15.4% over five days. The filing does not say how much the lender would get back if it had to seize and sell the chips, or what happens to that security if a new chip generation makes these ones obsolete before the loan comes due. Blue Owl manages $319bn and has already financed data centers for Meta. Across the ten largest listed funds that borrow money, lend it to mid-sized private companies, and pass the interest to shareholders, the share of loans where the lender has stopped counting the interest (because it stopped arriving) reached 3.95% in the second quarter, up from 3.75% in the first. The industry is adding a new, faster-depreciating kind of asset to a book that is already slowly getting worse.

The AI capex bubble28 Augmedium

Lambda borrows $1bn to buy chips Microsoft will rent

The strongest set of books in the chain is the one carrying none of the debt.

Lambda, an AI cloud provider backed by Nvidia, has raised about $1bn of short-dated private debt arranged by JPMorgan and placed with private investors. The money buys Nvidia graphics processors. The processors will be leased by Microsoft (Bloomberg). It follows a separate $926m loan that closed earlier this month for the same purpose, and comes while Lambda is in talks for a pre-IPO round of up to $3bn. Trace the circle. The chip vendor holds a stake in the buyer. The buyer borrows in the private market to purchase the vendor's product. The end user, one of the best-capitalized companies on earth, takes the equipment on a lease rather than buying it, so the asset and the debt sit on the small company's books and not on Microsoft's. Each party has a rational reason for its position. The combined effect is that the credit risk of a giant tech company's computing expansion is held by private investors, not by the giant tech company. What the reporting does not tell us is the shape of the Microsoft lease: how long it runs relative to the debt, whether Microsoft has to pay regardless of whether it uses the chips, and whether it can walk away. That single fact determines whether the lenders are really exposed to Microsoft or to Lambda. Nvidia has separately withdrawn the guarantee program that used to sit behind deals like this, where the chip maker would promise to rent the equipment back if the buyer could not. So on current evidence there is no vendor safety net here. More than $400bn of debt has been raised globally for AI this year. The share of it that ultimately rests on one lease clause is the number nobody has.

Private credit and BDCs28 Augmedium

Two banks stop selling Mark Walter's annuities

Insurance-funded private credit shrinks from the funding side first, and this is the funding side.

Truist and Fifth Third have paused distribution of products tied to Delaware Life Insurance, the largest insurer controlled by Mark Walter's TWG Global, while a US probe of Walter's empire proceeds (Bloomberg). The banks were acting as sales channels through branches and advisor networks; the insurance and market risk sat with the insurer. The background is a June disclosure that TWG's two insurers held more than $20bn of loans that should have been marked as affiliated but were not. S&P and Fitch, two of the three firms that grade how likely a borrower is to pay you back, cut their outlooks on Delaware Life in July. S&P held an A- rating while flagging that it could go lower. TWG says there "has been no fraud" and "no victim here". The mechanism worth understanding is the direction of the money. A company that sells policies paying a saver a monthly income for the rest of their life takes the premiums and invests them in longer, harder-to-sell credit, increasingly credit created by a manager it is affiliated with. The policy sales are the funding leg. Cut the distribution and the investment side stops growing; it does not immediately shrink, because these policies are stickier than bank deposits and usually carry penalties for cashing out early. There is no reporting of policyholders rushing to cash out here, and we should not imply any. But this is the first thing in weeks that looks like a lender pulling back rather than a number being revised. Insurance company books are the largest single destination for the risk that left the banks, and the way that pipe narrows is exactly this: a distribution partner declines to keep selling while a rating is under review.

The dollar, gold and reserve status28 Aughigh

Japan has spent $170bn buying its own currency

The largest foreign holder of US government bonds is selling them to defend its currency, and a domestic interest rate near 3% gives its savers a reason to stop sending money abroad.

Japan's Ministry of Finance disclosed on Friday that it spent ¥15.39tn ($96.5bn) between July 30 and August 26 supporting the yen, the largest single round on record. Adding April and May, the 2026 total is ¥27.13tn ($170bn), the biggest annual intervention ever, nearly double 2024's ¥15.3tn (Nikkei). Here is why this belongs in a US newsletter about financial risk. To buy yen, Japan must sell dollars. To get dollars, it sells US government bonds. Japan's holdings of those bonds stood at about $1tn in June, down 16% from a $1.25tn peak in 2021. Every yen-buying operation is, mechanically, new supply dumped into a market where the interest rate the government pays to borrow for thirty years has been near 5.3% and the Treasury Department has doubled its buyback operations to at least $4bn each to hold rates down. Which explains the otherwise odd fact that Washington joined Tokyo in a joint yen-buying intervention on July 31, the first in 28 years. That is not routine. Governments almost never coordinate currency operations. Supporting the yen is a way of stopping Japan from having to sell more US bonds. Two governments are jointly managing one price to protect another. The second leg is quieter and matters more. The interest rate on Japan's own ten-year government bonds has gone from 0.4% to about 2.9%, a 30-year high. Japanese investors sold a net ¥2.8tn of foreign bonds and stocks last week, after two weeks of buying more than ¥2.5tn each. August as a whole is still net buying. One week is not a trend. But the decades-long arrangement whereby Japanese savings funded everyone else's bond markets only works while there is nothing worth buying at home.

Crypto and TradFi contagion27 Aughigh

The dead model is up 37% in a month

A structure can be both discredited and still capable of moving 37% in a month; the borrowed money does not go away because the story did.

The FT published an analysis this week finding that the 50 largest companies that hold bitcoin as their main treasury asset have gone from a combined $150bn of market value in July 2025 to $67bn; that 43 of the 50 now trade below where they were before announcing the pivot, with 35 down by at least half; and that Strategy alone accounts for $79bn of the decline from its peak. One researcher called the frenzy "dead" (FT). The market disagrees, at least about direction. Over the last twenty days Strategy is up 36.5%, Bitmine up 37.7% and SharpLink up 33.9%, against bitcoin up 19.3%. On Friday all three fell about 7% while bitcoin fell 3.5%. Both things are true and the reconciliation is the point. These companies are not a business model. They are a leveraged bet on a coin, and roughly a two-times leveraged bet at that, in both directions. That is precisely what the FT's numbers describe: a structure that works while the shares trade above the value of the coins, because selling new shares adds value, and collapses when they do not, because the only way to keep going is to sell coins or issue debt. The $83bn of destroyed value is what happened when the premium vanished. The 37% bounce is what happens when the coin moves 19% and the leverage is still there. So the honest reading is not that the market has refuted the FT. It is that the sell-off the FT documents has left behind a smaller, still-leveraged instrument, and $67bn of it is a fraction of the $150bn that has already been written down without incident.

Hidden leverage and shadow banking28 Aughigh

Convertibles with no coupon and no cushion

Investors are financing the AI buildout by selling insurance against volatility and taking no income for it, which works until volatility arrives.

Global issuance of convertible bonds (bonds that can be swapped for the issuer's shares if the stock rises enough) has hit $147bn this year, more than 50% above the same point last year, and $72bn of it pays no interest at all, already within a whisker of the $73bn full-year record set in 2025 (FT). Bloomberg reports that a standard measure of how stock-like the convertible market has become is at its highest since 2021 (Bloomberg). A convertible is a bond plus the right to buy the issuer's shares at a set price. The more volatile the shares, the more that right is worth, and the less interest the issuer has to pay to sell it. Nicolas Crémieux of Mirabaud put it plainly: "The companies coming to this market now are far more volatile than the ones they replaced. If you're selling something more valuable, you can offer less for it." At zero interest, the investor's entire return is the bet on the stock. There is no income to cushion a fall in the shares. If the stock goes nowhere for three years, the holder has lent money for free; if it falls, they own an unsecured claim on a company that chose this market because borrowing the normal way was expensive. ON Semiconductor sold $1.3bn at 0% in May, Ciena almost $2.9bn at 0% in June. The last time the market looked this stock-like, the issuers were Peloton and Beyond Meat. The defenders' argument, that 2021 broke because of interest rate hikes, not structure, is worth taking seriously, but the odds of a September rate hike are now above 50%. And the concentration is invisible one deal at a time: a portfolio of thirty convertibles can be one bet on AI volatility.

Fed, Treasury and policy28 Aughigh

The Fed chair says rates may need to go higher

Nearly every floating-rate loan in private lending and every AI construction project was priced on the assumption that rates were heading down. The new Fed chair just made a rate increase the market's best guess.

Kevin Warsh, in his first speech since becoming Federal Reserve chairman in May, told the Jackson Hole conference that "we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." He added that borrowing conditions across the economy are not currently tight enough to slow inflation, and that interest rates are the Fed's "predominant tool." The numbers he cited: the Fed's preferred inflation measure running at 3.7% over twelve months and 4.1% over six, with 54% of the items in the index above 3% over a year and 49% over six months. The interest rate on two-year government bonds rose as much as 0.09 percentage points to 4.32%, while the rate on bonds that do not come due for thirty years fell slightly, according to Bloomberg. The implied odds of a rate increase in September went above 50%, up from around 36%. The next consumer-price report lands September 11; the Fed meets on the 15th and 16th. The mechanism worth holding onto is not the rate increase itself. It is that almost every structure we track was built on the assumption that the next move was down. Loans made by private lending funds charge a floating rate: the borrower pays a fixed margin on top of a benchmark rate (currently 3.64%) that moves with the Fed. A rate increase raises the interest payment on the same loan books where borrowers have already stopped paying at the highest rate in nine years. It improves the lender's income on paper and worsens the borrower's ability to pay in practice, at the same time. Debt financing AI data centers is being priced off today's interest-rate curve for assets meant to last fifteen years. And it collides with the Treasury Department, which borrows the money the government spends. Treasury Secretary Scott Bessent is buying back government bonds that do not come due for decades, trying to hold those long-term rates down, while the Fed prepares to push short-term rates up. The gap between two-year and ten-year rates sits at just 0.47 percentage points. There is not much room left in the curve to absorb a disagreement between the two arms of the state about which direction rates should go.

The dollar, gold and reserve status27 Aughigh

The scarcity trade reversed in a week

The most popular hedge against the government quietly debasing the dollar turned out to be a bet on the Fed staying passive, and it lost its footing in two days.

Gold and bitcoin funds that trade on the stock exchange pulled in a record $7bn over five trading days: $3.4bn into the largest gold fund (SPDR Gold Shares) and $1.5bn into the largest bitcoin fund (iShares Bitcoin Trust). Both ranked in the top ten among all US funds by money flowing in that week, with the gold fund trailing only a handful of funds including the main Vanguard index tracker, Bloomberg reported. The trigger was Bessent's plan to double the Treasury's purchases of its own long-dated bonds: investors read it as the government reaching for the interest-rate curve, and bought the two assets whose supply sits beyond its reach. Then it went the other way. Gold is down 3.4% over five days and 1.9% on Thursday alone. Silver is down 4.0%. The dollar index, which tracks the dollar against a basket of other currencies, is up 0.9% on the week. Bitcoin fell 3.1% in a session, though it remains up nearly 20% over twenty days. The trade was a joint bet on two things: that the Treasury would lean on long-term rates, and that the Fed would let it. Warsh's speech removed the second leg. A central bank willing to raise rates is a central bank that will not quietly print money to cover the government's borrowing, and the hedge against that scenario loses its point. The companies built around these assets moved harder than the assets themselves, as they always do. Strategy fell 7.3%, SharpLink 7.3%, BitMine 6.3%, Galaxy 7.4%, and Coinbase 7.4%, roughly twice bitcoin's own move. That is the arithmetic of holding something volatile inside a company that has also borrowed money: the swings run in both directions, and they were flattering on the way up. Nothing here is a break. It is a reminder that the fastest-growing hedge in the market is itself a bet, made with borrowed money, on a policy assumption that one speech can change.

Private credit and BDCs28 Augmedium

Loans going bad at a nine-year high; the lenders' shares near theirs

Six straight quarters of rising loan failures at the largest private lending funds, and their shares are priced as though the cycle has not started.

The ten largest publicly traded funds that lend to mid-sized private companies (known as BDCs) ended the second quarter with 3.95% of their loans, measured at original cost, no longer producing interest, up from 3.75% the previous quarter. That is $3.3bn across 101 borrowers against an $83.6bn loan book, with $772m of interest income at risk. Count every loan to every borrower that has at least one loan in trouble and the figure is 5.95%, up 0.54 percentage points in a quarter. Across the twenty largest funds, the median is the highest since 2017. The individual moves are the more telling part. A Jefferies tally puts Ares Capital at 2.4% against 1.5% in early 2025, Blue Owl at 2.8% from 1.4%, Golub at 2.9% from 1.2%, and Blackstone Secured Lending at 3.6% from 0.3%. That last one is a twelvefold rise from a very low base, over five quarters. Now look at the shares. Ares Capital is 1.26% off its recent high and up 6.2% over twenty days. Blackstone Secured Lending is up 7.3%, FS KKR 15.5%, Blue Owl's manager 19%. Nothing in the way these shares are trading suggests investors have read the filings. We do not think that is irrational so much as it is a statement about what these shares actually trade on: whether the dividend is covered. Coverage is comfortable because the benchmark interest rate is high, and these funds earn more when rates are high because their loans are floating-rate. But the benchmark rate is also what is pushing borrowers into trouble, because the borrower pays whatever that rate does. A rate increase widens the gap between the two things the share price depends on. It is also worth knowing that the decision to stop counting interest on a loan is a judgment made by the same manager who decides what the loan is worth on its books. The number tells you when they concluded the interest would not arrive, not when it stopped arriving.

The AI capex bubble28 Augmedium

Selling AI project debt into a falling market for AI builders

The next round of AI infrastructure debt is being sold against assets that only hold their value in the world where the debt is never tested, and the safety net from the chip maker was pulled last week.

IREN fell 13.7% on Thursday and 16.4% over five days, now 22% below its recent high. Core Scientific fell 7.2% and is down 20.9% over twenty days, 32% off its peak. Applied Digital fell 7.3%. On the same day, Microsoft closed at its high, Amazon rose 3.5%, and Alphabet 1.9%. The companies building AI infrastructure are falling while the companies paying for it are rising. Into that market, the financing pipeline: Applied Digital is gauging interest in roughly $3.5bn of bonds from companies too shaky to be considered safe, for its Delta Forge 1 campus in Louisiana. Novva is sounding out $800m for two Nevada campuses. Goldman Sachs is expected to lead a $1.085bn secured bond for a campus leased to CoreWeave, issued through a separate company affiliated with PowerHouse Data Centers and Chirisa Technology Parks. Nebius increased its fundraising to $5bn ($3bn of bonds convertible into shares due 2030, $2bn due 2034) against up to $25bn of building costs this year, and has begun pledging its infrastructure and customer contracts as security after a $775m July loan secured on existing chips and the revenue from one highly rated customer's agreement. More than $410bn has been borrowed this year for AI infrastructure. The order matters. Stock market money funds this build-out first and debt second, and the debt is secured on two things: chips, whose resale value collapses in precisely the scenario where you need to sell them, and a single customer contract. Last week Nvidia paused the program under which it would rent back unsold computing power, the guarantee that gave small cloud operators a residual buyer and made them creditworthy. The new deals are being marketed without it. Bonds from the large cloud companies already pay about 0.55 percentage points more than other corporate debt of similar quality, which a JPMorgan banker called a "material premium." Where Applied Digital's $3.5bn prices, if it prices, is the number to watch.

Hidden leverage and shadow banking28 Augmedium

The SEC asks four banks who lent the borrowed money

If four major banks each financed the same concentrated AI portfolio without seeing the whole picture, the fact that this one was absorbed tells you nothing about the next one.

On August 24 the SEC, the agency that polices American markets, sent legal demands for documents to Bank of America, Citi, Goldman Sachs, and JPMorgan Chase in the Situational Awareness matter, seeking information on the fund's trades and its use of borrowed money. The fund, run by 24-year-old Leopold Aschenbrenner, faced demands from its lenders for more cash and its portfolio was hit by roughly 67%. In an ordinary bad quarter a fund might lose 10% or 15%. Losing two thirds of your money in weeks is not a bad quarter. The Financial Times' account of the fallout fills in the other side. Jane Street had invested heavily in the fund, employed a former Jane Street person there, and held many of the same AI-linked stocks (Sandisk, Nebius, Bloom Energy). The stake and those positions were the main factors behind a $15bn hit to trading revenues and the firm's first losing month in a decade. In an August letter to staff, the firm admitted it was not protected against some of the moves. "When you start seeing the kind of revenue these guys are putting up, the only way that's possible is when your holding period extends as well as the size," Bloomberg Intelligence's Larry Tabb told the paper. "The longer your holding period, the more chance that something you can't forecast occurs." The legal demands ask the right question. The business of lending to trading firms is where hidden borrowed money actually lives: the terms are private, unpublished, and set by competition for the client's business. Archegos, the fund that blew up in 2021, worked because several banks each believed they held a modest position and none of them could see the whole. Nobody has said any bank lost money here; the loss landed on Jane Street's own capital, which is the reason nothing broke and the reason markets have been calm for seven weeks. What the regulators are trying to establish is whether that was structure or luck.

Bond market dysfunction28 Augmedium

Two arms of the state pulling in opposite directions

The Treasury Department is trying to hold long-term borrowing costs down while the Federal Reserve raises the cost of the overnight cash that finances the biggest buyer of those same bonds.

The Treasury Department will double its purchases of its own 10- to 30-year bonds to at least $4bn per operation from September 9 through early November, at least $28bn in total. The announcement came outside the regular schedule, and may be funded from the government's roughly $954bn cash balance at the Fed. The trigger was the interest rate on thirty-year government bonds hitting about 5.34%, its highest since 2007. Treasury buybacks are not unusual in themselves. Doing one without warning, outside the schedule that was supposed to contain it, is. The buyback bought a one-day rally; within 48 hours the ten-year rate was back above where it started. Three former senior Treasury officials have now said publicly they cannot see the case. "I do not think there were any meaningful signs of illiquidity in the market, and it is not clear what bar was met that triggered the expansion of the buybacks at this time," Citi's Nathan Sheets, a former under secretary, told Nikkei. "It was an unusual action. I did not find it shocking, but I found it puzzling." As of Friday the short-term end of the interest-rate curve is being repriced upward by the Fed while the Treasury buys the long-term end. Our own two-year series lags to August 26 at 4.19%, below the 4.32% Bloomberg reported during the day after the speech. The curve is flattening from both ends. The part nobody controls is who owns the long-dated bonds. Hedge funds carry roughly $4tn of total government bond exposure, including an estimated $830bn in a trade that profits from a small gap between two nearly identical prices (the cash-futures basis trade), nearly double its 2020 peak. That position is financed with about $3tn of cash borrowed overnight against bonds put up as security, with 90% of the exposure concentrated in fifty funds. A higher policy rate is a higher financing cost on the largest buyer at the margin of the government's own long-term debt. Japan, meanwhile, has spent ¥27.13tn buying yen this year, partly by selling the US government bonds it holds.

The AI capex bubble28 Augmedium

The AI tape splits along balance sheets

The first thing to break in a vendor-financed buildout is the middleman who owns the assets and none of the cash flow, and equities are now pricing that layer separately from the rest.

Friday's session was flat at the index level — the S&P moved 0.03%, VIX 14.59 — and violent underneath it. IREN fell 9.7%, Nebius 4.9%, Applied Digital 4.7%, Core Scientific 4.0%. Over five days IREN is down 12.6% and Core Scientific is 29% below its recent high. In the same session Microsoft closed at its period high, Amazon rose 1.5%, Alphabet 1.0% and Meta 1.7%, taking it up 5.6% on the week. The dividing line is not who builds data centres. It is who pays for them. The hyperscalers fund from operating cash flow and investment-grade bonds — expensive bonds, at roughly 55 basis points over other US corporate credit, which JPMorgan's Matthias Reschke calls a "material premium", but bonds that clear (Bloomberg). The neoclouds fund with secured paper against the machines. Nebius upsized its raise to $5bn this week — reported as $3bn of convertibles due 2030 and $2bn due 2034 — after a $775m July loan backed by existing GPUs and the cash flows from one investment-grade customer, and has begun collateralising infrastructure and customer contracts for further borrowing. Applied Digital is sounding out roughly $3.5bn of high yield for its Delta Forge 1 campus in Louisiana. That model needs two things: a residual value for used GPUs, and a buyer for compute nobody has yet contracted. Nvidia's paused rent-back programme was, briefly, the answer to the second (Reuters). It is gone. The equity market appears to be marking that withdrawal before the credit market does: high yield sits at 267bp and has tightened 7% in twenty days.

The AI capex bubble28 Aughigh

SoftBank's fourth financing for one equity stake

This is margin lending against a private, unmarked equity stake, wearing the clothes of ordinary corporate finance.

SoftBank is in the market for a $10bn two-year loan at around 275 basis points over SOFR, with Mizuho as lead arranger and commitments due 31 August. With SOFR at 3.64%, that is roughly 6.4% money. Proceeds would partly repay the $40bn bridge loan taken in March (Bloomberg). Count the layers. A $40bn bridge. A possible $10–20bn bond sale. A record ¥1tn ($6.3bn) retail bond offering to Japanese savers. Now a $10bn two-year facility. All of it to fund close to $65bn of equity in OpenAI by October. The structure is the point. SoftBank is borrowing on short and medium tenors, at floating rates, to hold an illiquid stake in a private company that pays no dividend and has no market price except the one set at its last round. Interest is due whatever OpenAI is worth. Refinancing has to be available every two years whatever the AI credit mood is then. A bridge is meant to be crossed once; this one is being refinanced with instruments that themselves need refinancing. The funding base is the second thing worth noticing. A retail bond in Japan sold to households, at a moment when the 10-year JGB yield is near 3% and every domestic saver has a rising risk-free alternative, is a materially harder sell than it was two years ago — and it puts Japanese retail money one step from an American AI lab's equity value. The Bloomberg report does not say what happens if the bond market shuts, and neither does SoftBank. Banks are already in talks to join the loan, which tells you the appetite is there today.

Hidden leverage and shadow banking28 Aughigh

A $15bn loss that nobody had to disclose in advance

The largest concentrations of AI risk now sit in balance sheets that publish nothing until after the loss.

Jane Street lost money over a month for the first time in a decade. The FT puts the hit at $15bn in trading revenues, driven by AI-linked positions and by its stake in Situational Awareness, the hedge fund run by 24-year-old Leopold Aschenbrenner, which was forced into a sale of its positions in July (FT). Jane Street was exposed to many of the same names Aschenbrenner owned — Sandisk, Nebius, Bloom Energy. In an August letter to employees the firm said it was not protected against some of the moves. The mechanism is a firm changing shape without changing category. Jane Street is still described as a market maker; it is now one of the largest financial institutions in the US, holding directional positions over long horizons. "When you start seeing the kind of revenue these guys are putting up, the only way that's possible is when your holding period extends as well as the size," Larry Tabb of Bloomberg Intelligence told the FT. "The problem with that is your clarity on the future declines." The same AI factor arrived by three routes at once: the trading book, the seed investment, and — reportedly — prime brokerage. A market-commentary sweep says the SEC sent subpoenas on 24 August to Bank of America, Citi, Goldman Sachs and JPMorgan seeking information on Situational Awareness's trades and use of leverage, with the fund's portfolio down about 67%. Treat that as second-hand until a paper of record carries it. One thing cuts the other way, and it should be said plainly: the system took a $15bn hit at a systemically-sized firm seven weeks ago with no funding event, no counterparty failure and no widening in credit. That is a mark that was tested and held.

Bond market dysfunction28 Aughigh

Lending to AI companies for no interest at all

The AI complex is now funding itself with the instrument that offers investors the least protection when the story stops working.

Companies have sold $72bn of zero-coupon convertible bonds this year, according to Dealogic, against a full-year record of $73bn set in 2025 (FT). Total convertible issuance is $147bn, more than 50% ahead of this point last year, and Bloomberg reports that a measure of how equity-like the market has become is at its highest since 2021 (Bloomberg). ON Semiconductor sold $1.3bn at 0% in May; Ciena sold nearly $2.9bn with no interest in June. The arithmetic is simple and it is not irrational. A convertible is a bond plus an option to swap into shares. The more volatile the share price, the more that option is worth, so the issuer can pay less for it. "The companies coming to this market now are far more volatile than the ones they replaced," Mirabaud's Nicolas Crémieux told the FT. "If you're selling something more valuable, you can offer less for it." What you own if the option stops mattering is an unsecured claim paying nothing. Our own arithmetic: a five-year zero-coupon bond discounted at 5% is worth about 78 cents on the dollar. In 2021 the same trade was done by Peloton and Beyond Meat, and it ended with holders of no-coupon unsecured paper on collapsing equities. The issuers are the tell. This instrument was popularised by Michael Saylor's Strategy, which used it to buy bitcoin; the AI buildout has adopted it wholesale. It is the cheapest financing available precisely because the underlying is the most volatile — which is a coherent trade and a poor cushion.

The dollar, gold and reserve status28 Aughigh

Japan spent $170bn on the yen this year

The marginal foreign buyer of US Treasuries is now a forced seller of them, for reasons that have nothing to do with America's fiscal position.

Japan's Ministry of Finance disclosed on Friday that it spent ¥15.39tn ($96.5bn) supporting the yen between 30 July and 26 August — the largest single round ever. Including April and May, 2026 intervention now totals ¥27.13tn ($170bn), the largest annual figure on record, against ¥15.3tn for all of 2024 (Nikkei). The plumbing matters more than the size. To buy yen you need dollars, and Japan raises dollars partly by selling US Treasuries. Its holdings stood at about $1tn in June, down 16% from a $1.25tn peak in 2021. So the largest foreign owner of US government debt has spent the summer shrinking its position — in the same weeks the US Treasury doubled its long-end buybacks to at least $4bn per operation to hold yields down, and, on 31 July, joined Tokyo in the first coordinated yen-buying operation in 28 years. Read that as one policy. Washington is helping support the yen so that Tokyo does not have to sell more Treasuries, while simultaneously buying Treasuries back. Both arms are pointed at the same variable: the US long end. The flows are turning too. Japanese investors were net sellers of ¥2.8tn ($18bn) of foreign bonds and equities last week after two weeks of buying above ¥2.5tn (Nikkei). August is still net buying overall, so this is not yet a trend — but with the 10-year JGB at a 30-year high near 3%, the structural reason Japanese institutions bought foreign bonds for two decades has weakened. Gold at $4,640 is up 15% in twenty days. The dollar index has barely moved.

Private credit and BDCs27 Augmedium

Australia is running the experiment first

The gate, not the default, is the mechanism that turns a credit problem into a liquidity event — and Australia is demonstrating it in public.

Administrators to the collapsed Sydney developer Bathla say creditors are owed an estimated A$3.3bn — a figure that excludes deposits paid by thousands of apartment buyers across hundreds of projects. Teneo warned that the "scale and complexity" of the group was at odds with the cash available, and that it would burn A$40m before year-end if it kept trading (AFR). Australia's private credit market is around A$200bn — small. What makes it worth watching is that its wiring is identical to the American version, and it is a few months further along. MA Financial has limited redemptions on its A$2.3bn secured property loan fund after a surge in withdrawal requests, moving investors to quarterly limits with only part of each request paid. ASIC has warned of the "first significant cracks", citing the collapse of several large borrowers and limited redemptions at several major funds. A gate is not a default; it is a queue. But it changes the economics for everyone in the fund. The loans behind a property development are carried at a valuation supplied, in effect, by the developer, until an administrator arrives and supplies a different one. Whoever redeems before that happens gets net asset value. Whoever is behind them in the queue gets whatever is left after the marks catch up. That asymmetry is exactly what produces a run in a vehicle that offers liquidity it does not hold. The US equivalent is not yet gated at scale, though sector commentary puts Q2 redemption requests at semi-liquid private credit funds averaging 14% of NAV against typical 5% quarterly limits — a tier-2 figure we would want confirmed. The listed BDCs, meanwhile, are calm: Ares Capital, Blackstone Secured Lending and Blue Owl all within 5% of their recent highs.

What would change our mind

The specific, observable things that would move the number - in either direction.

One of these listed funds cutting its dividend, or a fund that does not trade on an exchange freezing withdrawals after the record quarter for redemption requests. That would turn a valuation problem into a cash problem in the US, as it already has in Australia.

Would move the number

The Applied Digital $3.5bn bond deal or the Novva $800m deal pricing much wider than expected, or being pulled entirely. That would be the first evidence that the bond market has stopped funding chip-secured spending at the extra interest rate of 2.63 percentage points that the riskiest borrowers are paying today.

Would move the number

The overnight rate that banks charge each other printing persistently above the rate the Federal Reserve pays on reserves, or a widening in the gap between Treasury bond prices and Treasury futures prices, with $830bn of bets on that gap financed by roughly $3tn of overnight borrowing and 90% of it concentrated in fifty funds.

Would move the number

Conversely, we would lower the number if loans that have stopped paying stabilize at the third quarter and a large private credit book changes hands near the value the manager says it is worth. A valuation that has never been tested by an actual buyer, and then gets tested and holds, is a genuine reduction in how fragile the system is.

Would move the number