The bond sell-off comes for corporate America

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0:32Good morning from the Financial Times. Today is Tuesday, October 6th, and this is your FT News Briefing. Corporate America is wrestling with higher borrowing costs, and investors seem happy with where Brazil's presidential election is heading. Plus, insurers are trying to figure out who is on the hook when AI goes haywire. I'm Mark Filippino, and here's the news you need to start your day.

1:07Corporate America is feeling the effects of the bond sell-off. As U.S. Treasury yields rise, some companies are being forced to rethink their borrowing plans. If yields stay this high, investors say we might start seeing some more defaults. DFT's Kate Duguid is following this corporate crunch. Hi, Kate. Hi. So just give us a sense of scale here. how big of a jump in borrowing costs are we seeing? Borrowing costs for companies with the lowest credit ratings have hit their highest level since May 2020, just after the start of the COVID-19 pandemic. And that is about 17%. That's a huge amount of money to pay to borrow cash.

1:45This has been driven in part by the rise in treasury yields, but it's also the case that investors are demanding more of a premium to hold this riskier debt. the outlook for those companies in this rising rate environment is less good. And so they really can't afford it. And it wasn't necessarily built into their business model either. Right. These are zombie companies, right? Yeah, exactly. Yeah. These are the ones that existed pretty much solely on debt. Yeah, I remember those. So Kate, are companies already starting to feel pressure? And I guess, how are they starting to deal with that? So one of the things is that Bank of America has suggested that companies are pulling back or expected to pull back in October and not issue sort of as much as had initially been anticipated.

2:34So some companies are waiting out, seeing if they can wait out this jump in yields. But I think it probably also means that companies are going to different markets to see if they can get a better deal elsewhere. What do investors say could happen if borrowing costs stay high? So we have not yet seen a tick up in default rates. So while there's pain around borrowing, we haven't seen companies defaulting on that debt just yet. But if interest rates stay where they are, we should expect to see that level rise at some point. What could that do to the wider economy? So it's a really interesting question because usually it would slow down the economy as a whole.

3:15But there's this interesting phenomenon that is going on at the moment, which is that a lot of the corporate debt that is being issued is coming from companies that are building out AI projects. And those companies believe that not building out at this moment in time is so, so, so much more dangerous than slightly higher borrowing costs that they've basically been ignoring this jump up in yields. You know, if you're building colonies on Mars, you don't necessarily care about 25 basis points. You don't care about 50 basis points. And so they have not pulled back from borrowing just yet. That's the FT's U.S.

4:00Markets Editor, Kate Duguid. Thanks, Kate. Thank you.

4:09Hong Kong's de facto central bank has some burning questions for HSBC. Namely, what are you doing over there in Singapore? Europe's largest lender is putting its new AI hub there and not Hong Kong. And the Hong Kong Monetary Authority asked HSBC about the decision recently. That's according to two people familiar with the exchange. It's just another example of the rivalry between these two Asian financial hubs. And this AI center would be a bit of a blow to Hong Kong. It'll recruit more than 100 AI specialists to bolster the bank's wealth management and payments technology. HSBC declined to comment on its discussions with the HKMA about the Singaporean AI center.

4:49The HKMA said it, quote, regularly engages with authorized institutions on a wide range of matters.

5:03Investors are feeling optimistic about the first round of Brazil's presidential election. Right-wing candidate Flavio Bolsonaro, son of the former Brazilian president Jair Bolsonaro, came out on top. But he'll still have to face off against the left-wing incumbent, Luiz Inácio Lula da Silva, in a runoff later this month. Here to tell us more is the FT's Michael Pooler in Sao Paulo. Hi, Michael. Hi, Mark. So, Michael, real quick, do we have a sense of why people turned away from Lula? First of all, the polls underestimated support for Flavio Bolsonaro. And just as a reminder, he is the son of the disgraced former president, Jair Bolsonaro, who is serving a lengthy prison sentence after being found guilty of plotting a coup.

5:45So if you look at the big numbers, the economy has been growing fairly solidly under Lula and unemployment is quite low. But when you lift the lid up, people are unhappy with the cost of living. There's general economic discontent. Debt levels are quite high. And people are also worried about crime and safety. And I mentioned investors were happy with the fact that Bolsonaro came out on top. What happened in markets after the election results came out? That's right. On Monday morning, when markets opened, we saw the Real, the local currency and local stocks rally. And that's because investors are excited by the prospect of pro-market economic reforms under Flavio Bolsonaro.

6:25He's promised to cut state spending, to bring down public debt levels, all with a view to eventually allow the central bank to lower interest rates, which are a real drag on the economy. Whether or not Bolsonaro can actually follow through on those economic promises, though, remains to be seen. He'll need to get some of these measures passed by Congress, which is usually quite fragmented. So it will be a test of his political ability in capital. You've still got to win the election first. What are you looking out for in the lead up to the runoff? So we've got three weeks now until the second round, and it's really looking quite favorable for Flavio Bolsonaro.

7:01He got 47 % versus Lula's 45%. However, there were no other real left wing or center left candidates for Lula to scoop votes up from. Whereas the next three candidates after these lead two were all center to right wing, and it looks more likely that those voters would transfer to Flavio. That's the FT's Michael Pooler in Sao Paulo. Thanks, Michael. Thanks, Mark.

7:31The head of France's central bank has issued a warning about the country's public finances. Emmanuel Moulin told the FT that if the country doesn't clean them up, it's at risk of being, quote, strangled by interest rates. France is dealing with a wide deficit. Last week, the government proposed a budget with spending cuts and tax rises to try to address that. But it was met with destructive protests, and it's now having trouble getting passed through Parliament. Bond investors were not happy about that hurdle, and a sell-off in French debt got even worse. But Mulan, the central bank chief, says the country can still win back the confidence of investors if it passes a budget this year that narrows the deficit.

8:11it.

8:17Insurers are preparing themselves for hundreds of millions of dollars in damage claims related to rogue AI agents. The issue has been in the news recently. For example, AI agents developed by OpenAI hacked dozens of companies and governments worldwide. The insurance broker Aon analyzed more than 300 AI-related legal cases and found that insurers could be on the hook for costs related to these kinds of hacks. Lee Harris, the FT's insurance correspondent, says that's gotten the industry nervous. They think there are close to a dozen types of insurance policy under which they could be asked to pay claims if the AI labs are sued for these attacks by their AI agents.

9:01And there are quite a few scenarios insurers are investigating. So, for example, they think that they could be on the hook under insurance policies covering crime, intellectual property, cybersecurity, even media liability. And by the way, it doesn't stop there. AI executives could also be held liable for the rogue agents. And Lee says that would have big implications for insurers. One scenario they've been pondering is if the CEO of OpenAI or Anthropic is sued, insurers could potentially be on the hook under so-called directors and officers insurance policies. Some very senior people in the industry believe that if the AI labs have directors and officers insurance in place, it would probably pay out if the CEO were sued.

9:53OpenAI and Anthropic did not respond to requests for comment, but all this depends on how courts decide on AI cases. One source told Lee that public liability laws governing the use of online space don't exist yet. So lawyers looking to protect governments and companies will have to get creative. One interesting analogy that a lawyer described to me was environmental law, pollution. So they said that an AI swarm is almost like an oil spill in that it has all of these negative externalities on other parts of the economy, on governments or businesses, and it can cause them losses. But they will need to figure out under what terms to sue the AI labs, and they may look to pollution law as they bring these big court cases.

10:42But they're probably going to take years to move through the legal system. Lee Harris is the FT's insurance correspondent.

10:53You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

11:17The new episode of The Next Five is all about the freedom to invent with AI. Steve Tarza at Amazon joins me. I think there's such a huge opportunity for innovation, as does Jim Rowan at Deloitte. We see that when the C-suite is using AI, they get their teams on board as well. And Seth Fox at S &P Global. Our data is our crown jewels. We have to draw a bit of a line around the data, but not around the idea. Listen to The Next Five wherever you get your podcasts. Enjoy.