Citi: AI-related credit and stocks sold off; emerging cloud service providers and chip financing hit hardest

Citi's investment strategy division analysis states that the massive scale of debt financing for AI infrastructure is triggering investor concerns, with emerging cloud service providers and chip financing becoming the focus of this round of selling, dragging down both AI credit and equity markets in tandem. However, performance within the sector is clearly diverging, with price action driven by underlying credit fundamentals rather than mere short-term sentiment. Citi notes that market worries over rising AI construction debt and returns falling short of expectations, combined with slowing growth at leading frontier AI labs and renewed concerns about AI overbuilding, have led to a recent selloff in AI-related assets, with pressure spreading to the broader tech market and valuations of some leveraged credit assets approaching distressed levels. Among these, emerging cloud service providers are the most volatile and sentiment-sensitive sub-sector within AI high-yield bonds, with year-to-date returns falling to -4.8% (as of October 14); by contrast, data center bonds have returned 1.8% year-to-date, while power-related bonds have performed strongly with a positive return of 6.1%. Data shows that emerging cloud service providers have an annualized volatility of 13.1%, far higher than the 6.0% for the overall high-yield AI sector; their bond prices have the strongest correlation with the AI equity index, with every 1% move in AI stocks corresponding to a roughly 0.3% move in related bonds. This sub-sector's business is highly dependent on financing to purchase chips while also bearing technology depreciation risk, making it a high-leverage bet within the AI spacechanges in demand, return expectations, or technological iteration will directly hit its asset prices. Meanwhile, market views on chip financing are sharply divided, and there is no consensus on chip useful life, with investors demanding higher risk premiums. Citi believes that evaluating chip financing should move beyond narrative logic and return to credit fundamentals, focusing on checking the loan-to-value ratio (LTV), principal amortization mechanisms, quality of customer contracts, and guarantee and insurance arrangements related to chip residual value, with the core judgment being whether cash flows can be realized and whether principal and interest can be fully repaid.