Doug Noland: We Need to Talk

By Doug Noland on October 24, 2026

Michael Bond: I’ve brought the last half of Doug’s post to the front…

I have been repeatedly amazed by how deleveraging approaches the precipice – only to recoil. And I could be left awestruck once again. But the mechanisms necessary to get out of the mess this go round are unclear. Going back to the nineties, every time over-levered speculative markets were rescued, the upshot was only a bigger and increasingly systemic Bubble.

Everything went to such unbelievable extremes – across the globe. Debt debacles are everywhere, from the U.S. to Europe to China and Japan. Everything points to faltering sovereign debt Bubbles, fatefully coinciding with a floundering AI arms race/Bubble. Over the past 30 years, each deflating Bubble triggered a more precarious inflation.

I’ve argued the government finance Bubble is the end of the line. Never did I imagine a many trillions global AI debt Bubble. Now, with market risk aversion simultaneously pressuring government and technology debt, the next source of reflationary Credit is unclear.

At $103, WTI crude closed the week near highs since May. Energy markets are building in a premium for the resumption of major military conflict in the Gulf. Inflation would become an even bigger issue. The Warsh Fed will have no alternative than to significantly expand its balance sheet. The issue is how quickly and forcefully it will resume QE. The unfolding global de-risking/deleveraging will be shockingly destabilizing.

It’s such a different world than 2008 – and even from six years ago. There is so much uncertainty, animosity, hostility… Is the Fed willing to go big early? How might impaired bond markets respond to the prospect of massive global QE? To even more egregious deficit spending? Will there be global central bank coordination? How will an increasingly deviant Trump administration respond, especially if a blue wave materializes in 11 days?

Losses have started to mount. It’s difficult to envisage a backdrop more inhospitable to speculative leverage. Thursday was ominous. Fears were not allayed Friday. At this point, I assume de-risking/deleveraging is heading in the direction of the precipice. Then we’ll see what happens.

We need to talk about Thursday. It’s now basically (at least) a “holy crap” moment a week. But Thursday’s “moment” was different – more destabilizing, more alarming. The session certainly confirmed that the unfolding de-risking/deleveraging dynamic is globally systemic – and it’s accelerating.

Things got rolling overseas. South Korea’s tech-heavy KOSPI dropped 2.8% Thursday, with Samsung down 4% and SK Hynix sinking 5.5%. The KOSPI closed Thursday at the low since early April, with the index now down 42% from the June 19th record high.

Sellers were lined up to dump U.S. technology stocks at the open. Selling was unrelenting throughout the entire session. The Semiconductors opened the session down 4% and ended with a 6.7% loss. The MAG7 index fell 3.4% Thursday, with the Nasdaq100 2.9% lower. Notable decliners included SpaceX 9.1%, CoreWeave 10.1%, Meta 7%, Lam Research 11.8%, KLA 9.6%, and Applied Materials 8.2%.

October 23 – Bloomberg (Matt Phillips): “Global hedge funds suffered one of their broadest declines since the Covid pandemic following the stock market selloff on Thursday, according to Goldman Sachs… ‘For the first time since Covid, all three broad equity strategies fell more than 1% on the same day,’ the firm said… Global fundamental long/short managers were down 1.4% at the market close on Thursday, their worst day since July 16, with telecommunications, media and technology-focused funds falling by an average of 2.7%… Global systematic long/short managers were hit by their third-worst day since December 2023, dropping 1.3%.”

The above article quoted the Goldman Sachs’ prime brokerage team: “If last Thursday felt bad, today has been worse.”

The faltering AI Bubble was integral to Thursday’s sell-off, though de-risking went much beyond tech. Again, we’re thinking systemic.

French 10-year yields rose another six bps Thursday to 5.07% – up 57 bps in a month to the high back to July 2002. The France to Germany 10-year (OAT to bund) yield spread widened 15 to 174 bps – the widest risk premium since November 2011. This spread was at 86 bps in early September. For the week, the spread widened an extraordinary 30 to 167 bps. It’s worth noting that this spread’s widest “great financial crisis” level was 63 bps in March 2009.

The European debt market has dislocated. Italian spreads to German bunds widened 16 bps this week, with Greek spreads 14 wider. It’s worth noting that the European Banks (STOXX 600 Index) dropped 4.9% this week, and were down 9.5% m-t-d. Talk has been that European banks are less exposed to bonds than in the past. Time will tell.

Hedge funds have accumulated huge levered European bond holdings. The crisis of confidence in French sovereign debt has spurred deleveraging – the selling of French bonds and the unwind of short positions in German bunds (the funding source). And as the market begins to dislocate, safe haven demand for bunds intensifies. Sinking bund yields widen spreads versus other levered European bond markets (i.e., Italy and Greece), as “contagion” effects foment a broadening de-risking/deleveraging dynamic.

Highly levered Treasury and U.S. bond markets are acutely vulnerable to “contagion” and de-risking/deleveraging. Importantly, Thursday saw trading turn increasingly disorderly. Ten-year Treasury yields rose to 5.15% in late Wednesday trading. They fell below 5.10% in early Thursday trading, before sinking as low as 4.94% in the afternoon. For the session, yields sank almost 17 bps, the largest one-day drop since the March 2023 SVB/bank crisis.

Like Europe, the unwind of levered positions sees Treasuries significantly outperform higher yielding debt, while signs of market dislocation trigger aggressive “safe haven” Treasury buying. Derivatives also stoke market dislocation. There were reports of panicky buying of Treasury call options, as traders scurried to put on hedges to protect against surging Treasury prices (sinking yields). This can quickly turn problematic for various “carry trades” that use short positions in Treasuries to fund (or hedge) higher yielding instruments (i.e. corporates and MBS). Acute Treasury market instability and leverage don’t mix well.

High-yield spreads widened a notable 11 bps Thursday to 338 bps – the widest level since May 2025. Spreads have widened 74 bps over the past month. The yield on the Bloomberg High Yield index closed Friday at 8.37% – trading this week to the high (8.44%) back to “liberation day” April 2025.

Our deleveraging discussion must also include the marvelous funding source of the speculative world, the Japanese yen. The yen jumped 0.87% in Thursday trading. Using Japanese bonds as a funding source for yen “carry trades” (higher-yielding global debt instruments) has been such a home run. But not only is the yen showing a pulse, this week’s 12 bps drop in JGB yields was the largest weekly decline since “liberation day” de-risking.

European trading dynamics, especially for French and German bonds, have turned inhospitable to speculative leverage. This week’s yen and JGB trading dynamics were unfriendly to global yen “carry trade” leverage. And Thursday’s disorderly Treasury market trading solidified a trifecta of major risks for a highly exposed global leveraged speculating community.

This week’s intense liquidation of the precious metals is indicative of systemic de-risking/deleveraging risk, especially within the hedge fund community (with an understandable affinity for the metals). Silver sank 5.9% in chaotic Thursday trading. For the week, Silver dropped 5.4%, Gold 4.1%, and Platinum 4.3%. The precious metals get caught up in hedge fund de-risking/deleveraging. There is also the headwind of a deteriorating global liquidity backdrop.

When we discuss global de-risking/deleveraging and waning liquidity, we can’t overstate the impact on the historic AI mania and arms race.

October 23 – Axios (Matt Phillips): “Mark Zuckerberg’s Meta got smacked around Thursday after reporting earnings that looked pretty strong at first glance. Its drubbing in the stock market… suggests that investors are growing concerned that Big Tech’s insistence on pouring more and more capital into data centers could end up costing them in the long run. Meta’s revenue and adjusted earnings beat Wall Street estimates, but the company also raised the bottom end of its guidance for capital spending this year and deferred offering any guidance for 2027. ‘We expect to continue investing aggressively,’ the company said. Meta’s spending jag has fundamentally transformed the company’s cash flow dynamics, turning it from one of the greatest cash generators in the history of corporate America into a company that actually had negative free cash flow in the third quarter. Of course, it’s not alone. The AI buildout has had a similar impact on other hyperscalers…”

Meta Platforms fell 7% in Thursday trading and was down 12.4% for the week. With de-risking/deleveraging gaining momentum, the market message Thursday seemed loud and clear: the environment now beckons for spending, cashflow, and balance sheet discipline. That will certainly be a change of pace.

In my nomenclature, technology debt is losing its “moneyness.” Losses are mounting and liquidity is waning. Meta yields jumped another 12 bps this week to a record 6.29%, after ending June at 5.36%. CoreWeave (’32) yields spiked 92 bps to a record 15.07%

Following the previous week’s 25% drop, Goldman Sachs upgraded CoreWeave’s stock to buy and raised its price target to $139. The stock popped 6% at Monday’s open to $66. Buying was fleeting. CoreWeave closed the week down another 11.7% to $54.24, with a brutal 40.9% collapse over 13 sessions. The stock peaked at $187 on June 20th, 2025. CoreWeave CDS was up another 35 this week to 1,163 bps.

The environment has fundamentally changed. The days of endless liquidity, easy Credit, and general ultra-loose financial conditions finally ran their course. Today’s new paradigm will have significant consequences for the masters of the universe (within economies and markets), who for so long have feasted on the easiest “money” imaginable.

October 23 – Bloomberg (Carmen Arroyo and Laura Benitez): “SpaceX’s efforts to finalize a $40 billion off-balance-sheet debt structure for its artificial intelligence buildout have been roiled by recent market turmoil that’s driven up sector-wide borrowing costs and complicated price talks. The transaction under discussion is designed to fund the purchase of Nvidia Corp.’s chips through a special purpose vehicle, keeping the liabilities off SpaceX’s own books and safeguarding its investment-grade ratings, according to people familiar… Bankers led by Goldman Sachs… are discussing the structure with investors led by Apollo Global Management Inc., with Apollo-backed Atlas SP slated to manage the entity… While pricing discussions are ongoing, finding levels that both sides can agree on has become complicated by anxiety that has rippled through credit markets in recent days, the people said.”

SpaceX bond yields (’36) surged 22 bps Friday to a record 7.61%. Yields were 40 bps higher on the week, with yields now up 170 bps from the July 15th issuance level. SpaceX CDS surged 25 Friday to a record 266 bps, with a one-week gain of 49 bps. SpaceX CDS was 150 bps just five weeks ago.

It’s worth mentioning that SoftBank bond yields (’34) jumped another 28 bps this week to 10.23%, with a two-week surge of 75 bps. Meanwhile, U.S. junk bond yields traded this week to an 18-month high of 8.39%.

I’ve closely monitored de-risking/deleveraging episodes back to the 1994 bond market dislocation. Early in that unwind, it was perplexing that such a wrenching hedge fund deleveraging wasn’t having a more deleterious impact on system liquidity. But then I began to monitor extraordinary monthly growth in GSE assets, which by the end of the year had amounted to an unprecedented $150 billion of GSE “QE.”

The GSEs continued their quasi-central bank operations to resolve the 1998 LTCM/Russia deleveraging ($305bn) and the 2001 bursting Bubble de-risking/deleveraging episode ($345bn). The Fed’s balance sheet took over for the historic 2008 deleveraging ($1.3 TN). The 2011/2012 European bond deleveraging triggered a Trillion from the ECB (and another TN from the Fed). It took $5 TN to reverse pandemic de-risking/deleveraging. The 2023 SVB/Banking deleveraging was resolved by a quick $560 billion liquidity add from the Fed and FHLB.

There have been other fledgling de-risking/deleveraging episodes nipped in the bud by timely policymaker comments and policy measures. The June 2024 yen “carry trade” eruption and April 2025 “liberation day” episodes come to mind.

Losses have started to mount. It’s difficult to envisage a backdrop more inhospitable to speculative leverage. Thursday was ominous. Fears were not allayed Friday. At this point, I assume de-risking/deleveraging is heading in the direction of the precipice. Then we’ll see what happens.

Original Post 23 October 2026