Treasury's first big buyback fell short. Yields jumped across the curve.

Archived reading, published Fri, 11 Sep 2026 00:42:12 UTC (10 days ago). This is not the current state of the meter.

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CRASH-O-METER

Breaking

how close are we

+2 since the last reading

Fragility91

how much tinder is stacked up — moves slowly

Ignition47

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 39 sources and rewrites this page.

Why it moved: Up two to 69, into Breaking. Ignition rises from 43 to 47. Thursday, September 10, was the first of the Treasury's expanded buybacks actually to run, and it took $5.19bn of the $6bn it had offered to buy. The same day the interest rate the government pays to borrow for ten years closed at 4.94%, the thirty-year rate closed at 5.36% (its highest in 19 years), and the two-year rate, which we are taking from Bloomberg because our own figure for it is a day old, jumped 0.16 percentage points to 4.59% as traders priced roughly 70% odds that the Federal Reserve, America's central bank, which sets interest rates, raises them next week. The extra interest that the debt of companies too shaky to be considered safe pays compared with the government widened by 0.04 percentage points to 2.71, its first move in a month. Blue Owl and Blackstone fell another 3 to 4% (down 10% and 8% on the week), the listed AI companies fell 4 to 6% on the day, and the VIX, the market's gauge of how much turbulence traders expect over the next month, closed at 17.8; under 20 is calm, and it passed 80 in March 2020. Corporate borrowing costs are still low and the S&P 500, the main index of large American shares, is only 2.7% off its high, which is why four points and not more. Fragility holds at 91. Vantage turning to Pimco and PGIM after its banks reached their limits is the move of lending out of banks that we already count; Loparex at 5 cents is one loan's price being tested and coming out badly; Microsoft's 38 gigawatts is spending it has not yet borrowed for; and nobody was forced to sell anything.

Reporting from 7 Jul to 10 Sep

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.

Bond market dysfunction10 Sephigh

The Treasury offered to buy $6bn of its bonds. It took $5.19bn.

The one tool Washington has used to hold up its own bond market has now been tried in public, and investors answered by selling more.

The Treasury Department, which borrows the money the government spends, ran its first expanded buyback on Thursday: it had said it would buy back up to $6bn of its own bonds due in ten to twenty years, and it bought $5.19bn (Bloomberg). Buying bonds back is meant to push their prices up and borrowing costs down. Instead, by the close, the interest rate the government pays to borrow for two years had risen 0.16 percentage points to 4.59%, the largest one-day jump since the tariff selloff of April 2025; the ten-year rate was up 0.12 points to just under 4.95%; and the thirty-year closed at 5.37%, its highest in 19 years. The lever was pulled and the price went the other way. Why would a buyer trying to push prices up buy less than it said it would? A buyback is an auction run backwards. The banks that trade government bonds offer to sell them, and the Treasury accepts the offers it judges fairly priced, up to a ceiling. Taking less than the ceiling means the Treasury refused to pay what some of them asked. That is sensible housekeeping for anyone managing debt. It is also a message, that this is not a buyer who will pay any price, and the market heard the message rather than the housekeeping. "Bessent is bringing a squirt gun to a firefight," said George Catrambone of DWS Americas. Two things about how the money actually moves. The buybacks are paid for by selling short-term bills, so they swap long debt for short debt without reducing the total, and no new buyer appears. And the same afternoon the Treasury sold $22bn of new thirty-year bonds at 5.308%, the highest rate at any such auction since 2001, to what the FT called strong demand (FT). Nothing failed. There are still buyers for American debt; they are charging more for it. A $5bn purchase set against $22bn of fresh thirty-year selling on the same day was never going to change the price. The sharpest move was not in the long bonds. The two-year rate jumped because Brent crude hit $107 a barrel, August prices charged by producers came in at 5.4%, and traders moved to roughly 70% odds that the Federal Reserve, America's central bank, which sets interest rates, raises them next week. So the Treasury is buying long bonds to bring their rates down in the very week the Fed is expected to push the short rate up. Whether the two arms of government are working against each other depends on whether long rates are rising because of inflation or because of the sheer amount of debt on offer. Thursday said both. Eit

Fed, Treasury and policy10 Sephigh

The lenders who never asked the price are down to 43%

If the people who own America's debt have really changed, every new dollar Washington borrows costs more than the one before, and no buyback undoes that arithmetic.

Nineteen years ago, three quarters of US government bonds (76%) were owned by buyers who did not care about the price: foreign central banks piling up dollar reserves more or less automatically. Today that share is 43% (FT), according to Brad Setser of the Council on Foreign Relations, and that number is why a $6bn buyback is small against the problem. The other 57% is households and funds who want a return for their money. The interest bill alone now runs above $1tn a year, 3.2% of everything the country produces, and is 16% larger than the defense budget. The mechanism is the important part. When most buyers buy regardless, extra debt can be sold without offering a higher rate. When most buyers care about the return, every extra dollar borrowed needs a little more interest to find a taker; the higher interest swells the interest bill, which swells the deficit, which means more borrowing. Setser's phrase is that more debt "seems to accelerate the rise in the rate demanded". The line curves upward rather than climbing at a steady slope. Christopher Waller, a governor of the Federal Reserve, America's central bank, made a related point last week: there is "no more premium for safe, liquid US government debt". In other words, buyers have stopped accepting a lower rate just because the borrower is Washington. Into that, on Wednesday night, the president promised $5,000 to every adult if Republicans keep Congress, a pledge the FT reports would cost more than $1tn. Pooja Kumra of TD: "US buybacks and growing credibility risks are pushing term premia higher." In other words, lenders are demanding more extra interest for tying their money up for a long time. Thursday's thirty-year rate of 5.35% is the market's first reading of the two things together. It is not only America. The British government's ten-year borrowing rate hit 5.38%, its highest since 2007; Germany's reached 3.5%, the highest since 2011; and the European Central Bank raised rates to 2.5% and said inflation would stay "well above" its target. An oil shock is doing part of this everywhere. What is specific to the US is the shift in who holds the debt. This cuts against our usual story in one respect. Government bond markets are the most measured, most regulated part of the whole system, and they are repricing in full public view. Most of this is fragility being measured rather than added, since the buyers did not change this week, Setser counted them; the $1tn pledge is the piece that adds to the p

Private credit and BDCs10 Sepmedium

Sixty-three cents in March. Five cents now.

The prices private lenders put on their own loans are being checked one loan at a time, and investors are punishing the firms that set those prices before they punish the loans.

A fund run by Blue Owl has admitted that a loan it valued at about 63 cents on the dollar at the end of March is now worth about 5 cents. The fund, OBDC, is one of a class that borrow money, lend it to mid-sized private companies, and pass the interest to shareholders; it has stopped counting the interest on its loan to Loparex, a packaging company backed by the investment firm Pamplona, and marked the junior piece of that loan at roughly 5 cents (Reuters roundup). Funds trim the value of loans all the time, by a few cents. A fall of 58 cents in one quarter is not a loan going bad this spring; it is the fund's price finally catching up with a loan that had already gone bad. Stopping the interest matters because the interest is where the dividend comes from. The same reporting has OBDC carrying about $235m of junior claims on other borrowers at roughly 90 cents while the senior debt of those same companies, the debt that gets paid first, trades around 78 cents. If the people who get paid first think they will get 78 cents, the people who get paid after them cannot sensibly be worth 90. That is not a price. It is a disagreement between the fund's valuation committee and everyone else. We have this from a secondhand summary, so treat the detail as reported rather than confirmed. The totals point the same way. Across 44 of these funds, loans were valued at 97.57% of what was lent on June 30, down from 99.25% at year-end; loans no longer paying interest rose to 3.4% of the total from 2.5%; 81% of software loans were marked down against 40% elsewhere; and interest paid by adding to the debt rather than handing over cash has grown from 5.4% of these funds' loans in early 2022 to 9.8% by early 2026, per Boston Fed data cited in the same reporting (matterfact). That kind of interest counts as income. It is not cash. Now what the market did. The lending funds themselves are down 2 to 5% on the month. The firms that run them are somewhere else entirely: Blue Owl fell 4% on Thursday, is down 10% on the week and 13% on the month, and sits 17.6% off its high; Blackstone is down 14% on the month. The extra interest paid by companies too shaky to be considered safe is 2.71 percentage points above the government, which is to say it has barely moved. The stock market is selling the managers' fee income, the money they earn for looking after other people's savings, for raising new funds, for running funds that have shut the exits and cannot take in new money as easily, befor

The AI capex bubble10 Sephigh

Vantage's banks have lent all they will. Now it is asking Pimco.

When banks stop lending to a company that has borrowed $48bn and investment funds step in, the risk moves from a place regulators watch closely to one they barely see.

Vantage Data Centers, which has borrowed nearly $48bn since the start of 2025 (per Infralogic), is negotiating a credit line of up to $2bn from Pimco, PGIM and other large investment managers, a deal called Project Baja, because the banks it has been borrowing from have lent as much as they are willing to (FT). Vantage is a major builder for Oracle's Stargate, the vehicle through which OpenAI is buying $300bn of computing power. Banks do not usually run out of room for a customer this size. That they have, and that the next dollar is coming from funds instead, is the story. The FT's phrasing is exact: the part of Wall Street that lends for big construction "traditionally funds the construction of airports and gas pipelines", and the AI build-out has overwhelmed it. Banks are also trying to cut how much they have riding on any one developer, by selling AI loans into the bond market and by paying other investors to take on the risk that the loans go bad while keeping the loans on their own books. So the next dollar comes from institutional money, which, as our inference rather than anyone's reporting, means largely insurance and pension savings managed by firms like Pimco and PGIM. Two features matter. First, this is a line Vantage can draw and repay across several campuses in Virginia and Nevada, not a loan against one building. The lender is backing Vantage the company, and what stands behind the loan is a portfolio of leases. Second, follow the leases up: Vantage builds, Oracle leases, OpenAI contracts with Oracle. A pension fund's exposure to whether OpenAI can pay $300bn now runs through three companies in a row, none of which is a bank and none of which puts a fresh price on that exposure every day. That is the thesis of this site in a single deal, and it is fragility: one more thing on the pile, though we already counted the migration, which is why the meter did not move for it. Demand is not the limit. Bloomberg reports Microsoft plans to more than triple its capacity to 38 gigawatts by 2032 from about 12 today, on top of $145bn spent building things last fiscal year (Bloomberg). Money is the limit. What the market did on Thursday: Oracle fell 5.3%, CoreWeave 6.1%, Nebius 5.1%, Applied Digital 5%. On the week all four are up 4 to 12%. In this group a 5% day is ordinary. But swings that size are themselves a form of borrowing getting dearer, because anyone asked to stomach them charges for it.

Household credit10 Sepmedium

A rate rise arrives on top of a record in late car payments

Household borrowing is where a rate rise turns into people not paying, and the share already behind is at a level that used to take a recession to reach.

Lenders to ordinary Americans had a bad week before the Federal Reserve, America's central bank, which sets interest rates, has done anything: Affirm is down 8.2% in five days, Capital One 4.4%, Synchrony 3.7%, and Sallie Mae 8.1% on the month. Falls that size are not dramatic on their own. What changed underneath them is that traders now put roughly 70% odds on the Fed raising rates next week, and the interest rate the government pays to borrow for two years rose 0.16 percentage points on Thursday. A rate rise is landing on borrowers who are already behind at levels that used to require a recession. The mechanism runs through pricing. Credit card rates move with the bank's benchmark rate, so a rise reaches the borrower within one monthly statement. Car loans are fixed, so existing borrowers feel nothing, but the lender's own cost of money (the deposits it takes, and the loans it bundles and sells to investors) goes up while what its car loans pay does not. Buy-now-pay-later debt is short and refinanced constantly, which is why Affirm moved most. The borrower is already stretched. New York Fed data for the second quarter, as summarized in our sweeps, show one in eighteen dollars of car loans three months or more behind, worse than the peak of the Great Recession (5.5% of balances 90 or more days late, against 5.3% then). Among car loans to borrowers with poor credit that were bundled and sold to investors, 6.13% were late in July, a record for that month; banks have given up collecting 3.82% of card debt; and some 3.6m federal student borrowers have defaulted since the payment pause ended (sweep). A Fed survey cited in the same reporting has 34% of adults earning under $25,000 failing to pay all their bills in full last month, against 7% of those earning over $100,000. None of this is new risk. We have carried the second-quarter figures for weeks, and the sourcing in front of us for the July numbers is secondhand, so we hold it loosely. What is new is the spark getting closer: a rate rise arriving on top, and investors deciding to sell the lenders whose profit margins shrink fastest. That is ignition, not fragility. One oddity. Credit Acceptance, which lends to the borrowers with the worst credit of all, is 0.5% off its high. The market appears to believe that a lender which already prices for people not paying is safer than the ones that price for people who do. In a downturn that has sometimes been right.

Signs of the times

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

One company, more power than New York

Microsoft plans to run more than 38 gigawatts of data centers by 2032, up from about 12 today, which is more electricity than New York state has ever used at its peak. That is one tenant's own plan, before anything it rents from CoreWeave.

ai_capexpowerscale

10 SepBloomberg

Texas has 474GW waiting to plug in

The Texas grid operator is weighing about 474 gigawatts of requests to connect, more than five times the most power the state has ever drawn at once; when the governor paused new connections for an audit, the federal forecast for all US electricity growth in 2027 was cut from 2.9% to 1.8%. One state's waiting list is now big enough to move the national number.

ai_capexpowerqueue

9 SepBloomberg

Stablecoin private credit, from the Ferrari lender

Tether has launched a fund aiming to raise $3bn to lend USDT, its digital token meant to be worth exactly one dollar, to small businesses that "conventional funding channels have historically underserved", with the lending decisions made by Fasanara Capital, which in June began lending against Ferraris. It enters the business in the same week that established private lending funds stopped letting investors withdraw and valued a loan at 5 cents.

crypto_tradfiprivate_credit

9 SepFinancial Times

A $1tn promise, priced by Thursday lunchtime

On Wednesday night the president promised $5,000 to every adult if his party keeps Congress, a pledge estimated to cost more than $1tn; by Thursday the interest rate the government pays to borrow for thirty years was at its highest since 2007, and an analyst of bond markets was citing "credibility risks" as a reason. The bond market now reprices campaign speeches overnight.

policybondsfiscal

10 SepFinancial Times

The rumour mill

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

Partly true

“Markets are pricing roughly a 70% chance of a Fed rate hike at the 16 September meeting.”

The 69.8 to 70% figure is real and reported by the WSJ and others for the September 15 to 16 meeting, though it was 62% on August 31 and moves every day. Thursday's 0.16 percentage point jump in the two-year borrowing rate fits with it.

Claimed by Meet Kevin

Partly true

“Oracle issued about $20bn of stock in the quarter, ran negative free cash flow of about $5.4bn, and saw software licence revenue fall 14.5%.”

The $20bn raised by selling new shares gradually into the market, and roughly $5bn more going out than coming in against about $28bn spent building things, are supported by Oracle's own release and coverage of its results; license revenue fell about 15%. The claimed $4.2bn debt repayment and the cash figures are not substantiated. Oracle fell 5.3% on Thursday.

Claimed by Meet Kevin

Partly true

“Tether's USDT is no longer backed only by Treasuries — the issuer has started buying gold and silver instead.”

Tether did add about 14 tonnes of gold in the second quarter, taking its holdings to roughly 146 tonnes, but its reserves still include about $115bn of short-term US government bills, which remain by far the main backing. There is no sourced evidence of silver purchases.

Claimed by Palisades Gold Radio

Partly true

“South Korea is buying gold for the first time in 13 years while dumping US Treasuries.”

The Bank of Korea's first gold-linked investment in 13 years is about $250m of shares in the SPDR Gold Trust, a fund that holds gold, which is small. Government bonds held for foreign central banks at the New York Fed are at their lowest since 2012 across all central banks together, but nothing establishes Korea 'dumping'.

Claimed by Palisades Gold Radio

Earlier developments

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

Bond market dysfunction10 Sepmedium

The Treasury is buying $4bn of its own bonds a session. It is not enough.

A program announced to hold down the government's long-term borrowing costs has now run for two days. Those costs rose on both, which tells you the government is not the one setting the price.

The US government's borrowing costs rose for a second straight day this morning and now sit above every level in our last eight readings (the ten-year rate at 4.92%, the thirty-year at 5.35%). This is the second day of a Treasury program announced specifically to stop that from happening. A government stepping into its own bond market to push down what it pays, and losing on both days it tried, is not routine, and it tells you who actually sets the price. The program itself: on August 19 the Treasury Department, which borrows the money the government spends, said it would double its buybacks of bonds coming due in ten to thirty years, from $2bn to at least $4bn per operation, running from September 9 to November 4. One tally puts September's total at about $38bn (sweep). The Treasury buys old long-term bonds from the dealers who hold them and pays for them by selling new IOUs that come due in weeks. The market ends up holding less of the debt whose price falls badly when rates rise, and more of the kind that barely notices. Bessent, who runs the Treasury, has called it a 'Treasury Twist'. The twenty- and thirty-year rates fell sharply when it was announced in August. They have risen since the buying actually began. Why might $4bn a session fail to move a $28tn market? Because the people who set the price at the margin are not the Treasury. Hedge funds are financing about $3tn of government bond holdings with cash borrowed overnight against bonds put up as security, and roughly $830bn of that is one trade: borrowing heavily to profit from a small gap between two nearly identical prices (Reuters). Japan sold down $88bn of foreign securities in August to pay for a record defense of the yen. One ally's monthly selling was twice the Treasury's entire September buyback. And Waller, one of the Federal Reserve's governors, said on September 3 there is 'no more premium for safe, liquid U.S. government debt'. In other words, investors no longer pay extra to hold it because it is no longer scarce, so the interest rate that neither speeds nor slows the economy is higher than it was (sweep). Two details are worth watching. The five-year rate rose more than the ten-year today, even though the buybacks target the longest bonds, which suggests the market is repricing borrowing at every length rather than reacting to how much long debt is on offer. And gold fell 2.2% over five days while the dollar rose. That is not money fleeing America. It is money demanding more interes

Private credit and BDCs9 Sepmedium

A tenth of Blackstone's biggest lending fund asked for cash. Half got it.

These funds cap how much money can leave each quarter, which turns what would be a forced sale into a waiting list. That is why the strain in lending by investment funds shows up in the managers' share prices rather than in the interest rates their borrowers pay.

Blackstone's Private Credit Fund, a $77bn pool that lends to companies in place of banks, told its investors it would honor withdrawals equal to 5% of shares this quarter. Requests came in at about double that (roughly 10%, or about $4.3bn). The Cliffwater Corporate Lending Fund, at $31bn, got requests for about 16% of its shares and will also pay out 5% (sweep). KKR's Income Trust I, which hit its 5% cap in an earlier quarter, saw requests fall back to 2.5% this time. One fund hitting its exit cap is not unheard of. Two of the largest hitting it in the same quarter, one of them asked for three times what it will pay, is a queue forming. The cap is working as designed, and that is the point. These funds are sold to wealthy individuals as 'semi-liquid': you can get out, but only a slice per quarter, and only if not too many others want the same slice. When requests exceed the cap, nobody is forced to sell a loan at whatever price it fetches, so no valuation is tested and no loss is made real. The strain shows up instead as a line of people waiting. The line is information. The price the Blackstone fund says its own holdings are worth fell about 4% in six months (from $24.68 a share at the end of January to $23.64 at the end of July). One in ten holders would rather have cash today than that number in a year. Reuters looked at 44 listed funds that borrow money, lend it to mid-sized private companies, and pass the interest to shareholders. Their loans are carried at 97.57% of what was lent, 3.4% have stopped paying interest at all, and 81% of their software loans have been written down this year (Reuters). The listed funds trade every day, so the market prices them every day. The unlisted ones publish a number and let the exit line do the talking. What the line does to the machine is the part that matters. A fund honoring 5% a quarter has to hold or raise that cash, so it lends less and renews fewer loans as they come due. A borrower who counted on the same lender to lend again in 2027 now faces a lender managing its own outflow. Blue Owl's OBDC cutting the value of its Loparex loan from 63 cents on the dollar to 5 cents in a single quarter is what it looks like when that new loan does not arrive. What we cannot see is how many holders who were turned away left their request in the queue rather than withdrawing it. If next quarter's requests exceed 10%, the cap has stopped being a feature and become the story. Does this move the odds of a crash? Not today. We

The AI capex bubble10 Sephigh

Amazon now borrows at Korean chipmaker rates

When the world's most creditworthy companies borrow at the same rates as companies in developing countries, because of how much they plan to borrow, the part of the AI building spree paid for with debt gets more expensive just as it gets bigger.

SK Hynix, the Korean memory-chip maker, now borrows at almost the same rate as Amazon: its bonds due in 2031 pay just 0.09 percentage points more than Amazon's, a third of the gap a year ago. It is now cheaper to buy insurance against SK Hynix failing to pay than against several US tech giants. And for the first time on record, the extra interest that companies in developing countries pay compared with the safest US companies has closed entirely. That gap has historically run 0.3 to 0.5 percentage points. It is now a few hundredths (Bloomberg). This is not because Korea got safer. It is because US tech companies have borrowed more than $600bn around the world to pay for building AI data centers, with new borrowing expected to run into the trillions by 2030, and bond investors charge for supply. The interest rate one of the giant cloud companies pays increasingly reflects how much the buyer expects it to borrow next year, not the chance it fails to pay. Puneet Sharma of Zurich Insurance puts it plainly: developing-country debt is a 'passive beneficiary'. JPMorgan expects the gap to close fully by year-end. The same force is visible in Switzerland, where AI-related names are 26.4% of all corporate borrowing in Swiss francs this year, and Swiss finance chiefs time their own bond sales to avoid the weeks when an American giant is in the market (FT). AI debt is about a fifth of all borrowing by well-rated US companies this year, against 1% in 2024, and Goldman estimates borrowing will pay for a third of AI building spending in 2026 (Reuters). Read it alongside this morning's government bond move. Waller of the Federal Reserve says investors no longer pay extra to hold US government debt because it is no longer scarce; the corporate market is saying there is no longer a premium for America's largest companies over a Korean memory maker. Both are supply stories. Both mean the cost of paying for the buildout rises the more of it there is, which is the opposite of what made the first $300bn cheap. For the odds of a crash, this is the slow kind, and it is measurement rather than growth. Nothing here is a failure to pay. It is a price rising until enough investors are willing to hold the debt, and that price is now being set by whoever buys the fifth trillion, not the first. The pile of AI debt was already in our number. Today we learned what the market charges to hold it.

Hidden leverage and shadow banking10 Sephigh

A central bank names the hedge fund that moved its market

Bets on the AI boom are being placed with borrowed money, through contracts traded in markets whose regulators can see the price swings but not the borrowing behind them.

South Korea's central bank told its parliament on Thursday that contracts traded abroad and tied to Samsung Electronics and SK Hynix need closer watching, because their growth 'risks amplifying domestic market swings'. It named one firm: Situational Awareness, a US hedge fund focused on AI, reported to have bet with borrowed money of up to four times its own stake while building and then dumping positions in memory-chip stocks worldwide during July's selloff (Bloomberg). Central banks warn about foreign speculators all the time. Writing a single fund's name into a report to lawmakers is not something they do. The plumbing is what matters. Korea's main stock index is dominated by two chipmakers that supply the memory for AI servers, so a bet on the AI buildout can be placed as a bet on Korea, with borrowed money. Foreigners do this through instruments Korean regulators do not supervise. BlackRock's US-listed Korea fund, a quarter of which is SK Hynix, took in a record $2.8bn in a single week in July. Hong Kong lists funds that magnify the daily moves of each company. Hedge funds add borrowing from their banks on top. When the trade reverses, the selling lands in Seoul from balance sheets, the lists of what a firm owns and owes, that sit in Connecticut and Hong Kong, financed by banks whose exposure Korea cannot see. This is the migration we keep describing, in a new place. The risk is not on a Korean bank's books. It is in a hedge fund's account with the American bank that lends it money and holds its positions, in the machinery by which an exchange-traded fund creates and cancels its shares, and in structured products sold to ordinary savers in Hong Kong. A central bank has now put a fund's name into its monetary policy report because it had no other tool. What the report does not tell us is how large the remaining positions are, or who lent the money for the four-times bet. Bloomberg reported in July that Citadel bought AI stocks from Situational Awareness during the rout, which means the position moved rather than vanished. Goldman and Morgan Stanley, the two lenders to hedge funds we track, are within 1% to 2.5% of their share-price highs. The market's view is that this is Korea's problem. The Bank of Korea's view is that it is somebody else's borrowing. This does not raise the odds of a crash, and it does not lower them. Nothing was added and nothing came unwound. What changed is that a regulator said out loud a thing we already carry: an AI bet made w

Crypto and TradFi contagion10 Sephigh

Two kinds of 'tokenized stock'. Only one votes.

Digital tokens that stand for shares are starting to be pledged as security for loans in crypto markets, and whether the token is the share itself or a promise from the broker that holds the share is the whole question when everyone runs for the exit at once.

Nasdaq is putting $100mn into Payward, the parent of the crypto exchange Kraken, at a valuation of $21bn, and Kraken will offer digital tokens that stand for Nasdaq-listed shares to its customers. The tokens, Bloomberg reports, carry 'the same voting rights as regular equities' (Bloomberg). That last detail is the reason this matters, because a rival product from Robinhood does not. The same day, Robinhood's Vlad Tenev was on CNBC defending his company's tokens tied to AMC shares against AMC's chief executive, who objects to them. Tenev's tokens are built differently. They are debt, issued by a separate Robinhood company and backed by shares that company holds. Holders get no vote. Asked how Robinhood will vote the shares it holds on their behalf, Tenev said the company 'hasn't really announced plans for the voting aspect' (CNBC). The word is the same. The instruments are not. A Nasdaq token, on the description available, is a share in a new wrapper: the company knows who holds it and the holder has an owner's rights. A Robinhood token is a promise from Robinhood, with nothing pledged behind it beyond shares that Robinhood controls, votes (or does not), and could in principle lend on to somebody else. The buyer owns Robinhood's promise to pay, not a piece of AMC. Why this belongs on a page about how trouble spreads: the point of putting stocks on a blockchain is to let people pledge them to a lender, trade them around the clock, and borrow against them on crypto venues. Something pledged to a lender behaves very differently in a panic when it is a promise from a middleman than when it is the asset itself. The crypto lenders that failed in 2022 failed on exactly this distinction. Tenev's argument that companies 'don't control other companies issuing their own securities that reference those shares' is correct in law. It is also a description of how a market in imitation shares grows without the real company knowing. We do not know how Nasdaq's design carries voting rights onto a blockchain, where the underlying shares sit, or who holds them in safekeeping. Those are the questions that decide whether this is a cheaper way to keep a shareholder register or a new layer of firms who have to be good for their promises, wearing a familiar ticker. For the odds of a crash, this changes very little today, and we are including it because the design choice will matter later. It is slow tinder at most: a new kind of pledge that has never been tested in a run. Nothing h

The dollar, gold and reserve status10 Sepmedium

The story that the world is dumping the dollar is smaller than it sounds

If the selloff in US government bonds is about lenders demanding more interest for tying money up, and about heavily borrowed holders, rather than about the dollar losing its place, then both the fix and the way it fails look different from what the dollar-decline story implies.

A study by two economists at the New York Federal Reserve, Linda Goldberg and Sneha Parthasarathy, finds the dollar's share of the reserves that central banks hold fell to 56% last year from 64% a decade earlier, and that almost all of the decline is the work of a handful of countries, with China and Russia doing most of the active shifting between 2015 and 2019. In every period they looked at, roughly as many countries raised their dollar holdings as cut them. Their conclusion: 'little evidence of widespread official de-dollarization' (sweep citing Bloomberg). A fall of eight points in a decade sounds like a trend. Two countries doing most of it is a decision, not a trend. This cuts against a story we have carried, so it is worth saying plainly. This morning's markets agree with the Fed's researchers. US government bonds sold off hard, and the dollar rose 0.4% while gold fell. That is the pattern of a market demanding more interest, not a market abandoning the currency. A 'sell America' day would look like the reverse. What the study does not cover is the thing actually moving government bonds. Japan's holdings of foreign securities fell $87.8bn in August, the size of its record defense of the yen; the biggest official seller of US debt right now is an ally propping up its own currency, in coordination with Washington, not a rival leaving the system. China's central bank bought 19.9 tonnes of gold in July, its 21st straight month, but at a third the pace of its previous buying spree (Caixin). The Dutch central bank moved 86 tonnes of gold from New York to London, so it could get at it in a crisis rather than to get out of dollars. So the picture is this: a few determined diversifiers, a large ally selling for reasons that have nothing to do with the dollar's standing, and a base of private holders, hedge funds financing their bonds with cash borrowed overnight against bonds put up as security, and now foreign private investors more than foreign governments, that borrows more and flinches faster than the central banks it replaced. That is a weakness in the market for US government debt, not in the dollar's place in the world. On the odds of a crash, this one lowers them on this front, and we should say so. The risk we were carrying under 'the world dumps the dollar' is smaller than we thought, because the evidence for it is thinner. The risk in the government bond market itself is not smaller, and the bonds beat carries it. We are keeping this beat cooler

Fed, Treasury and policy9 Sepmedium

Two tests: one already in the prices, one next week

The buyback and the campaign to lift the yen are being run as two separate policies, but both draw on the same $1.1tn pile of US government bonds that Japan owns, and next week's Bank of Japan meeting decides which way that pile flows.

The Treasury Department, which borrows the money the government spends, was due at 11am Wednesday to say how many of its own bonds it would buy back on Thursday, the first time it has put a size on the enlarged program it promised on August 19. The interest rate the government pays to borrow for thirty years closed higher on the day regardless (5.29%, with the ten-year at 4.84%, both above where they stood when the promise was made). The Treasury already had a schedule of small buybacks penciled in; doubling them in a hurry, two weeks after publishing that schedule, is an attempt to hold its borrowing costs down. On the first day the tool was used, it did not hold them. The August promise was to 'at least double' the $2bn operations penciled in two weeks earlier, and this week's repurchase covers bonds that come due in ten to twenty years. Bloomberg's preview set the terms for what would count as enough. Dealers expected more than $4bn, Lou Crandall of the research firm Wrightson thought $5bn to $6bn plausible, Morgan Stanley put the practical ceiling at $10bn, and anything at $4bn 'could prove a disappointment'. The announcement itself is not in the reporting in front of us, so we cannot say what the number was. What we have is the close. The ten-year finished up 0.03 percentage points on the day. Whatever the size, the people who buy government IOUs that do not come due for twenty or thirty years did not read it as a cure. The second test is Japan's, and it is next week. Bessent, who runs the Treasury, has spent a fortnight telling Tokyo to 'do the right thing' on interest rates and claiming 'asymmetric information' on the Bank of Japan. In other words, he says he knows something about the bank's intentions that the rest of the market does not. Markets now price a quarter-point rate rise from Japan's central bank. Some investors, Bloomberg reports, have moved to expecting half a point, or two rises in a row. Seisaku Kameda, a former chief economist at the bank, calls those expectations 'excessive' and says they will probably need to be scaled back. The two tests are one test because of where Japan's money comes from. The yen is the best-performing of the ten major currencies this month, up 4%. Japan's holdings of foreign securities fell $87.8bn in August to pay for a record ¥15.4tn of buying its own currency, and Japanese economists think the most plausible way it raised that cash was by selling US government bonds. If the bank's governor, Ueda, delivers

Private credit and BDCs9 Sepmedium

Blackstone down 12% in a month. Its loans, 0.1%.

Investors have decided the trouble in lending by funds rather than banks is a problem for the firms that manage the loans, not yet for the loans themselves. Which of those two gets tested first decides how orderly the exit is.

Blackstone's shares fell 3.7% on Tuesday, are down 5.6% on the week and 12.3% over twenty trading days, and sit 13.6% below their high. The manager behind Blue Owl fell 3.2% and is 14% off its high; Ares lost 2.7% and KKR 1.6%. The funds those firms run barely moved: Blackstone Secured Lending fell 0.3%, Ares Capital 0.2%, Blue Owl Capital Corp 0.4%, and the fund that tracks the debt of companies too shaky to be considered safe fell 0.2%. That is the odd part. The firms that manage the loans are being sold as if something is wrong, and the loans themselves are priced as if nothing is. The extra interest those shaky companies pay compared with the government was 2.67 percentage points on Monday's reading, about where it has sat for a month. So the two prices are two different statements about the same loans, and both hold together. A manager earns a fee on the money it looks after. The engine of the last five years has been funds that never close and do not trade on an exchange, like Blackstone's $77bn BCRED, which grow by wealthy individuals continuously subscribing new money. That engine depends on new money arriving faster than old money leaves. Last week BCRED received requests to withdraw roughly 10% of its shares, about $4.3bn, and honored 5%, which is its cap. Cliffwater's $31bn fund received requests for 16% and paid out 5%. Every financial adviser in the country now knows the exit door is not guaranteed to open. New subscriptions do not stop, but they slow, and a fee stream that was compounding stops compounding. That is what the manager's share price is pricing. The fund itself barely moves because its value is the price the manager itself says its holdings are worth. BCRED's stated value per share went from $24.68 in January to $23.64 in July, a 4% decline. And the loans, for the most part, are still paying. Lenders see interest arriving. Shareholders see a growth story ending. For now this changes the odds of a crash very little, and we should say that plainly. Nothing was sold in a hurry, and a cap on withdrawals is doing what it was designed to do, which is to stop a run before it starts. The standoff resolves when withdrawal queues build for several quarters in a row and a manager must choose between selling loans at whatever price other investors will pay, which tests whether its stated values are real, or telling investors to keep waiting, which tests whether they keep trusting it. The first choice would move the fragility half of our meter

The AI capex bubble9 Sepmedium

474 gigawatts waiting to plug in. Texas pressed pause.

Getting connected to the grid, not raising money, is now what limits the build-out of AI data centers, and the debt already borrowed against Texas sites was priced as if it would not be.

The Energy Information Administration, the federal agency that forecasts American energy use, cut its forecast for how much electricity demand will grow in 2027 to 1.8% from the 2.9% it projected in August. The reason is a single state decision. Last month Texas ordered an audit of every proposed data center seeking to connect to its grid, a requirement Bloomberg says has 'effectively halted development'. The state's grid operator is sitting on about 474 gigawatts of connection requests, more than five times the most power Texas has ever drawn at once. One gigawatt is roughly one nuclear reactor. That number is not a forecast of what will get built. It is a queue, and queues in this business are padded, because developers file for several sites to secure one. But the region that includes Texas was expected to account for nearly 40% of the nation's growth in electricity sales in 2027, and that share was the premise behind a good deal of borrowing. The borrowing is where it bites. The site-by-site structures we have been tracking work like this: one of the giant cloud companies holds about 20% of a separate company set up to hold the data center off its own books, and lending funds and bond investors put up the other 80%. The debt is repaid out of lease payments, and the lease payments begin when the facility is switched on. Nscale is reported to have closed up to $1.85bn of loans, ranked first for repayment and backed by the property, for a campus in Ward County, Texas, last week. We do not know whether that project is caught by the audit, and we do not know who pays the interest while a switch-on date slips; that depends on lease terms nobody has published. But a grid pause moves the day the revenue starts without moving the day the interest is due, and somebody is on the wrong side of that gap. The stock market has decided it is nobody. Vistra and Talen, two power producers, are both up about 9% on the week. The smaller companies that rent out computing power for AI rallied 16% to 23% over five days before giving back 3% to 5% on Tuesday. This does not add to the pile so much as show us the pile more clearly, so it leaves fragility where it was. In one respect it cuts against our argument: the constraint here is physical, visible and sitting on a public regulator's desk, which is the opposite of a hidden risk. In another it does not. The debt the pause delays is not visible at all.

Crypto and TradFi contagion9 Sephigh

Tether, which issues digital dollars, will lend them to small businesses

It is our whole argument in miniature, lending drifting to the least-measured corner it can find, with the twist that the lender's motive is demand for its coin rather than getting paid back.

Tether, which issues USDT, the $183bn digital token meant to be worth exactly one dollar, launched a $400mn lending fund on Wednesday with London-based Fasanara Capital and is aiming to raise up to $3bn more from outside investors. The fund, called StableFund, will lend to small and medium-sized businesses 'that conventional funding channels have historically underserved', with the financing 'USDT-linked'. Fasanara, which manages $6bn, will find the borrowers and decide who is creditworthy. In June it began lending against Ferraris. A firm that started lending against sports cars in June is deciding in September which small businesses get a crypto company's money. The logic from Tether's side is simple. Its business is the gap between what it pays and what it earns on its reserves: issue a dollar token, hold the dollar in US government bonds, keep the interest. That only grows if the number of tokens in circulation grows, and USDT's total value has been flat all year. A lending fund denominated in USDT creates demand for the coin at the moment somebody borrows, and gives people chasing a return a reason to hold it. The FT frames the fund explicitly as an effort 'to boost the use of its dollar-linked cryptocurrency', which is an unusually honest description of what a credit fund is for. The timing is the interesting part. Traditional lending funds are, in the FT's words, writing down portfolios, facing defaults and gating redemptions. In other words, they are admitting loans are worth less than the books said, watching borrowers fail to pay, and refusing to let investors take all their money out. Into that market steps a lender whose borrowers are, by definition, the ones banks turned down, in an instrument whose reserves were audited in full for the first time last month. The FT does not say where the initial $400mn comes from, Tether's own profits or something else, and does not say whether reserve assets are involved. The outside money, if it arrives, sits in a fund, not behind the promise that each token is worth a dollar. So on what we know this is not a risk to USDT's backing, and it does not move our number. It is something smaller and more characteristic of the period: another pool of lending outside any regulator's line of sight, to borrowers nobody else would take, valued by the people who made the loans. That is one more twig on the pile, not a spark, and a small one.

Hidden leverage and shadow banking9 Sephigh

A country borrowed €1bn without calling it borrowing. Nobody can say what it is.

It is the first time this cycle that borrowing dressed up as a derivative has reached the point where the borrower cannot pay, and how it is sorted out will tell banks what happens to the security they hold when the same thing happens somewhere larger.

Senegal, whose debt crisis began when billions of dollars of loans turned out to have been left out of the official figures, has borrowed more than €1bn in a way nobody can now classify. International banks lent it hard currency and took Senegal's own bonds, issued in its local currency, as something valuable pledged to the lender, which they keep if the country cannot pay. The contracts are called total return swaps. On paper they count as a derivative, a side bet on a bond, rather than as a loan, which is how they stayed out of the reported debt. Now the country is heading for default, and nobody can say whether the banks are in line with the foreign bondholders or protected alongside the local ones. Last week Senegal announced a 'treatment plan' for the debt it owes abroad, alongside a draft $2.2bn rescue loan from the IMF, which lends to countries in trouble, and the price of its foreign bonds plunged. It then said it would keep paying that foreign debt for now, including an interest payment due September 13, and that debt issued at home in the CFA franc, which is pegged to the euro, is excluded from any restructuring. S&P Global, one of the three firms that grade how likely a borrower is to pay you back, cut Senegal's grade to CC on Friday and called default 'a virtual certainty'. The swaps sit across that line. What was pledged is domestic debt; the cash came from foreign banks. If they count as foreign, the banks share the losses with bondholders. If they count as domestic, the banks are protected, and the foreign creditors, as S&P warns, may refuse to be the only ones taking a loss. Senegal has not said. The FT flags one more mechanism: the swaps can trigger a demand from the lender for more cash, right now, if the interest rate on Senegal's local bonds rises and the pledged bonds lose value. So the borrowing that helped Senegal keep going may also have limited how far it could let its own bond market fall. In dollars this is small, and it does not move our number. It matters to us as a specimen. A total return swap lets a lender hold a risk that appears nowhere as a loan, and lets a borrower carry debt that appears nowhere as debt, right up until the moment somebody has to decide who gets paid first. That is the same property that runs through the structures we spend most of our time on. Here it has arrived at the decision point, in public, with a payment date attached.

Bond market dysfunction8 Sephigh

The house has two tables and one stack of chips

The Treasury Department, which borrows the money the government spends, is now the buyer holding up prices in two markets at once, and its own reporting says it has limited money for at least one of them.

The Treasury Department, which borrows the money the government spends, is now propping up two markets at the same time: it is buying Japanese yen for the first time in thirty years, and it is buying back its own long-dated bonds. On Tuesday the man who runs it, Scott Bessent, told an audience at Southern Methodist University that this makes the Treasury "the house". "When we intervene with the Japanese yen, I have pretty good insight into what the Bank of Japan is going to do," he said. "And you can bet against me if you want." A Treasury Secretary talking about the government's finances as though they were a betting book is not routine. It is, as far as we know, unprecedented. Count what the house is doing. It bought yen on July 31 alongside Japan's finance ministry, the first US yen purchases in three decades. It is repurchasing its own government IOUs that do not come due for ten to twenty years, having said on August 19 it would "at least double" the $2bn operations it had penciled in two weeks earlier; the size of Thursday's buyback is due at 11am Washington time today. And it is publicly pressing the Bank of Japan, Japan's central bank, to raise interest rates. These are one move, not three. Japan spent a record sum defending the yen in August (¥15.4tn, about $98.6bn), and its holdings of foreign bonds fell by $87.8bn; the working assumption is that most of what it sold was US government bonds. If the Bank of Japan raises rates, the yen strengthens on its own and Japan does not have to sell those bonds. Failing that, the Treasury's buybacks soak up some of what Japan sells. So the Treasury is buying bonds back from the very country it is asking to stop selling them, while both governments buy the currency that would make the selling unnecessary. The chips are the constraint. Bloomberg noted last month that the Treasury has only limited money for buying currencies, and the July intervention wore off within a few days of trading. On the bond side, Morgan Stanley puts the practical ceiling for a single buyback at $10bn, Lou Crandall of the research firm Wrightson thinks $5–6bn is plausible, and most forecasters on Wall Street expect more than $4bn. Too small a number disappoints a market in which the ten-year borrowing rate (4.81%) is now higher than it was when the August promise was made. Too large a number, Crandall wrote, is "an admission that the Treasury hadn't thought through its hasty August 19 announcement". The yen is up about 4% this month w

Hidden leverage and shadow banking8 Sepmedium

Eleven percent, 96 cents, and a better seat

The market's average price for shaky corporate debt says credit is calm; the first borrower through the 2027 refinancing wall is being asked to pay 11% and to push its existing bondholders to the back of the line.

Bank of America has spent the past month trying to raise $750m of new debt for Cogent Communications, a telecoms company, to pay off bonds that come due in June 2027 and currently cost Cogent 7%. The price being discussed for the new debt has climbed from 9.5% to 11%, Bloomberg reports, and buyers still want more: the bonds would be sold at a discount (96 cents on the dollar), and the bank has floated a structure in which the new lenders get guarantees or pledged assets that the existing bondholders do not. That is the story. Two years ago this company borrowed at 7%. Today the market wants 11%, a discount, and a better seat. The new bond would be first-lien, meaning first in line for Cogent's assets if the company fails, where the old bonds are unsecured, meaning backed by nothing in particular. Prospective buyers also want promises written into the loan about what Cogent does with the money from selling its data centers. Nothing is agreed. Two things about how this works. First, the old 2027 bonds traded at about 91 cents on the dollar on Friday, having been at almost 100 cents on August 7. Cogent's business did not change in that month. What changed is that its lenders learned someone else might be offered a better seat at the table. The structure has a name, "pari plus": one borrower, two classes of lender, and the newer class ahead of the older one in everything but the label. It used to be the last resort of companies in real distress. It is now the opening bid on an ordinary refinancing. Second, look at the average. The extra interest the shakiest companies pay compared with the government sits at 2.68 percentage points, within a whisker of where it sat all summer, which is to say calm. Cogent, a going concern offering lenders first claim on its assets, is being asked for 11% plus a four-point discount. Before the discount that is about 6.5 percentage points more than the government pays to borrow for two years, by our arithmetic, or more than double the average. The average is made up of companies that do not need to borrow this quarter. The price for those that do is set one deal at a time, and this deal says the door is far narrower than the average implies. One more detail. Cogent sold ten data centers it inherited from Sprint for about $225m in June. It is selling data centers into the most eager data-center market in history and still cannot refinance a 2027 debt for under 11%. Old racks and AI racks, it turns out, are different assets. Bloomb

The AI capex bubble9 Sephigh

Two percent of Switzerland's bond market, per deal

The AI borrowing wave has outgrown the dollar market and is now large enough to reshape small currency markets one deal at a time.

Companies building artificial intelligence have sold more than a quarter of all the corporate bonds issued in Swiss francs this year (26.4 percent, according to Zurich Insurance research reported by the FT). That is a higher share than in any other major credit market. Alphabet raised about SFr3bn in February and Amazon SFr2.82bn in May, and each of those deals was close to 2 percent of the entire existing Swiss corporate bond market and more than ten times the size of a typical bond sold on the SIX Swiss Exchange. Nine months ago this market barely knew these borrowers. Now Swiss companies plan their own borrowing around them. The point is where the debt lands, not how much of it there is. The Swiss market has traditionally been made of bonds in the SFr200–250m range, bought by pension funds and insurers and held until they are paid back. Those same buyers are now swallowing single deals of SFr3bn from one sector. Arthur Jurus of the bank Oddo BHF calls it "a structural change of scale". His line that "AI issuers aren't creating the demand, they're revealing it" is generous to the borrowers and a little alarming about the buyers. Swiss corporate treasurers, he says, now move their own bond sales or shrink them to avoid the weeks when one of the big American cloud companies is in the market. Zurich estimates that Alphabet, Amazon, Microsoft, Meta and Oracle will spend about $5.5tn building things between 2025 and 2030. They have gone to euros, pounds, Canadian and Australian dollars and yen for the same reason they have come to francs: the dollar market alone is not big enough to fund that at the price they want to pay. For the fragility number this is measurement, not new stock. We already count the AI debt; the Swiss data tells us that a slice of it sits in the books of Swiss pension funds and insurers, held to maturity, unlikely to be repriced until something forces it. That cuts partly against our worry, because this is plain, graded, exchange-listed debt, and partly for it: a small, conservative market has let one sector become a quarter of its new borrowing in nine months, and the buyers are not the kind who sell. The odds of a crash did not change today. Our map of where the tinder is stacked got a little better.

Private credit and BDCs9 Sepmedium

Ten percent want out. Five percent get out.

Withdrawal limits mean the prices private credit funds put on their loans are never tested by the people leaving, only by the loans the manager is eventually forced to sell.

Investors in the largest fund that lends to companies in place of a bank asked to take out roughly twice as much money as it will give back. Blackstone Private Credit Fund, known as BCRED, holds about $77bn and is not traded on any exchange; it disclosed on September 3 that investors asked to withdraw about 10 percent of their shares this quarter. It will pay 5 percent, the ceiling it has always had, which leaves about $4.3bn of requests stuck behind the limit. Cliffwater's flagship corporate lending fund reportedly had requests for about 16 percent of its shares and likewise paid 5. A fund refusing to give back half of what its investors ask for is not a normal quarter. These figures reach us second-hand through Bloomberg and Reuters rather than from the funds' own documents, so treat the decimals loosely; the shape is not in doubt. Here is the shape. A fund of this kind promises to buy back up to 5 percent of its shares each quarter, at whatever price it says its loans are worth. When more people ask than that, everyone gets a slice and the rest of their request lapses; they have to ask again next quarter, in a longer line. Two things follow. The people who get out are paid the fund's own valuation, not a price anyone in the open market agreed to, so the limit guarantees that valuation is never tested by an exit. And every investor who suspects the valuation is flattering has a reason to get in line early, which is how a 10 becomes a 16. The manager can meet the requests with new money from wealthy individuals, with bank credit lines, by lending less, or by selling loans. Only the last one tests the valuation. That is why two other prices matter more than the withdrawal numbers: a second-in-line loan to a company called Loparex, held by Blue Owl, fell from 63 cents on the dollar to 5 cents in a single quarter, and a Carter Place property loan held by Metrics drew bids far below what it was owed ($270m). Those are the prices the people in line are waiting to learn. The publicly traded relatives fell again yesterday: the firm that manages Blue Owl's funds was down 4.4 percent and the big listed lending funds, the ones that borrow, lend to mid-sized private companies and pass the interest to shareholders, were down 1–2 percent, while the extra interest shaky companies pay compared with the government sat unchanged at 2.68 percentage points. One analysis puts the share of BCRED's loans on which interest has stopped arriving at 2.2 percent of what it paid for

Fed, Treasury and policy9 Sepmedium

A week to the Fed's meeting: a rate rise expected, a cut demanded

A central bank raising rates while the Treasury buys back bonds and the president demands cuts is three signals pointing three ways at a long-term bond market that has already stopped charging a safety discount.

The Federal Reserve, America's central bank, which sets interest rates, meets on September 15–16, and traders think it is more likely than not to raise them. On Friday the president posted that the Fed board "with its great new leader, must get smart — BE PATRIOTS for a change" and cut rates instead. A president publicly demanding the opposite of what the market expects a week before a decision is not the ordinary run of things. Bets on the Fed's next move put the chance of a rise somewhere between a coin flip and two-to-one on (56 percent per CME FedWatch on September 8, 66 percent on August 31). Investors, Bloomberg's editorial board notes, shrugged. The thing to hold in mind runs through long-term borrowing, not short-term. Christopher Waller, one of the Fed's governors, said on September 3 that there is "no more premium for safe, liquid US government debt" and that this pushes the rate the Fed should aim for higher, while saying he leans toward leaving rates alone if inflation cools. In other words, lenders no longer give the US government a discount for being the safest borrower in the world. Put that beside the Treasury's buybacks. One arm of the government is buying ten-to-twenty-year bonds to pull long-term rates down. Another is considering a rate rise that would push short-term rates up. And the president is demanding the opposite of what the market expects from the second arm, which is exactly the kind of noise that makes lenders demand more for tying money up for a long time, the very thing the first arm is trying to squeeze down. None of this is a crisis. The rate banks charge each other overnight sat at 3.63 percent, almost nobody parked spare cash with the Fed overnight ($525m, a rounding error), and the cash banks hold at the Fed edged up to $2.93tn. The short-term cash that keeps trading desks running is flowing normally. The government pays 0.44 percentage points more to borrow for ten years than for two, and 5.25 percent to borrow for thirty. The risk this week is not in the plumbing. It is in whether the new chair raises rates ahead of the midterm elections over the president's public objection, and what that does to a bond market that Waller says has already stopped paying for safety. That is a story about how close a spark is, not how big the pile is, and this week it moved neither. What we will watch: how the vote splits on September 16, and whether the thirty-year rate moves on the decision or on the presidential post that follows i

Crypto and TradFi contagion8 Sepmedium

Visa is lending to card issuers on the blockchain

The everyday credit that card companies run on is moving from bank loans to computer contracts, which is the whole thesis of this publication in miniature.

Visa now runs more than 160 card programs tied to digital tokens meant to be worth exactly one dollar, almost three times as many as a year ago (up almost 200 percent), and its head of crypto, Cuy Sheffield, told CNBC that new card issuers are joining "every week". That is not the important sentence. The important one is that Visa is now testing, with a company called Credit Coop, a way to lend those card issuers money through contracts that run on a blockchain rather than through a bank, feeding its own payment data to the lenders so they can judge who is good for the money. Why a card issuer needs credit at all: there is a gap between the moment a cardholder spends and the moment the issuer gets paid back, and somebody has to fund that gap. In the ordinary system that is a bank loan, sitting on a bank's balance sheet, the list of what it owns and owes, where a regulator can see it. Here it is a piece of software, funded by whoever puts money in the pool, secured on money owed in digital dollars, with Visa's data as the thing that decides who qualifies. This is small. There is no number for the size of the trial and we should not pretend there is. But it is a clean example of the pattern this publication exists to track: a lending relationship that would once have lived inside a bank is being rebuilt outside one, faster than anyone is measuring it. "Hypergrowth mode" is Sheffield's phrase. Coinbase fell 3 percent yesterday and bitcoin is flat on the week (about $79,600); the market is not treating any of this as a risk, and it is probably right, for now. It changes the crash odds very little. We are including it because it shows where the next unmeasured pile is being stacked.

Private credit and BDCs8 Sepmedium

Investors are selling the lenders, not the loans

When the loans themselves cannot be traded, trouble shows up first in the shares of whoever collects the fees on them, and that is where it showed up this week.

Blue Owl, one of the biggest firms lending privately to companies, saw its shares fall again on Monday and has now lost the better part of a tenth of its value in a week (down 4.4% Monday, 8.3% on the week, 11% below its high). Its rivals fell with it (Blackstone down 6.5% on the week, KKR 3.6%, Apollo 3.6%, Ares 3.3%). The funds these firms run, which borrow money, lend it to mid-sized private companies and pass the interest to shareholders, fell less (1.7% to 2.0% on Monday). And the public market for the debt of companies too shaky to be considered safe did almost nothing: the extra interest those borrowers pay compared with the government is 2.68 percentage points, three hundredths of a point more than a week ago. Shares down 8%, bonds unmoved, is not what a normal week looks like. That gap is the story. The things falling are the managers, whose value is the stream of fees they earn on money they look after. The thing not moving is the public market in shaky company debt, which holds bonds of large companies with public credit grades. The loans being written down are neither. They are loans to mid-sized software and industrial companies, with no public grade, sitting inside private funds. Reuters looked at 44 of these lending funds and found they valued their loans at 97.6 cents on the dollar at June 30; at ten comparable funds, loans on which interest has stopped arriving rose to about 3.4% from 2.5% at the end of last year, and 81% of software loans had been written down this year. Blackstone's roughly $77bn fund, BCRED, let investors take out 5% of their money when they asked for 10% (about $4.3bn honored), and Cliffwater's main fund capped withdrawals at 5% against 16% requested. None of that is new this week; we have counted all of it. What is new is that stock investors have started to put a price on it, in the one place it can be priced. When a fund limits withdrawals, it protects the value it puts on its own holdings by refusing to sell loans at prices that would show what they are really worth. That does nothing for the manager. Its next fund is harder to raise, and its fee income shrinks if more money leaves than arrives. So investors are selling the business rather than the loans, which is what you would expect when the loans cannot be sold. What we cannot see from outside is whether the selling reflects knowledge of what the third-quarter valuations will show, or just a week of bad headlines. Blue Owl's lending fund trades at a reported 22

What would change our mind

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

The Fed holds rates on September 16 and the two-year rate gives back most of Thursday's 0.16 point jump, or the ten-year closes back below 4.80%: we would take ignition down.

Would move the number

The extra interest paid by companies too shaky to be considered safe widening past 3.25 percentage points, or the lending funds' shares falling to catch up with the 13 to 17% drop in their managers': the credit market confirming what the stock market is saying would move ignition up sharply.

Would move the number

A Treasury buyback taking its full maximum with long-term rates falling on the day, or a thirty-year auction going badly, with buyers demanding a clearly higher rate than expected: the first would ease things, the second would say the auction market itself is struggling.

Would move the number

A second large private lending fund that ordinary investors cannot trade shutting its doors to withdrawals, cutting its payout, or disclosing that another lender values the same loan differently: that would be new risk rather than new measurement, and would move fragility for the first time in weeks.

Would move the number