In addition to a smorgasbord of macro data, a Fed meeting and earnings reports from Alphabet, Amazon and Microsoft, market participants are compelled this week to watch high yield credit.

Indeed, there’s a case to be made that the near-term direction of equities and risk sentiment will turn more on whether the distress (and you can take “distress” figuratively and literally) evidenced in ballooning high yield spreads and fast-propagating problem loans moves beyond the junkyard than whether GDP beats or misses. Or whether core PCE’s hot or cool. Or what Kevin Warsh says on Wednesday.

At the risk of oversimplifying (which goes with the territory and hardly counts among the most dangerous occupational hazards I’ve chanced in my life), the chart to watch is the figure below and others like it.

The worst junk isn’t just underperforming, it’s ablaze. The question’s straightforward: Is that mostly a function of the idiosyncratic risk that goes along with eclectic CCCs, or is it a credit cycle harbinger?

Some of what you’re seeing in deeply discounted credits is the AI threat manifested. That threat — the specter of “technological obsolescence,” as Bloomberg aptly put it — is by no means confined to companies already priced for oblivion. Or even to sectors, like software, that already reflect a substantial “disruption discount.”

As is becoming more clear to me every time I ask ChatGPT to complete a task — whether it’s gathering data, creating an editorial collage of Scott Bessent or, over the weekend, conjuring screen print-ready vector files by reimagining gradients as halftones — any job that doesn’t involve manual labor or depend on the conveyance of personal experiences (i.e., autobiographical narration), is either obsolete already or will be soon.

What I find particularly interesting about the burgeoning credit scare is that it’s occurring at both poles (among the bluest of blue chips and the junkiest of the junk), and for the same reason (the AI revolution).

In the linked article, Bloomberg cites Barclays in noting that by sector, Tech, Media and Telecom “dominate distressed CCCs.” “Like software, cable and telecom companies face pressure from new technology,” Aaron Weinman, Josie Reich, and Paula Sambo wrote.

But the expensive push to build out that new technology is causing consternation at the highest end of the corporate credit spectrum, where spreads on the most creditworthy companies in the history of capitalism now trade meaningfully wide to the broader IG universe.

The figure above’s a reminder: Professional capital allocators view the most likely source of a credit event not as CCC gangrene that eventually causes sepsis, but rather as a panic triggered by hyper-scaler over-borrowing. (Do note that “agentic AI bank run” made it onto the list this month, which is funny in a gallows humor sort of way.)

Note also that the hyper-scalers and Nvidia have a vested interest in underwriting and backstopping some of the names which are beginning to look like problem credits.

That’s part and parcel of the symbiotic, self-referential nature of the AI deal web, and the implicit obligation connects, in a direct way, the very top-tier of the IG market to junk tiers.

As one apparently witty netizen put it late last week, captioning a chart of Nvidia’s widening CDS, “at this rate, The Bank of Nvidia will have to taper quantitative leasing.”

Bottom line: Credit’s where the action is right now, and that’s not usually a good thing. You want calm credit, not exciting credit.