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Elon Musk’s xAI Set to Raise $5 Billion Debt Despite Tepid Investor Interest

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Elon Musk’s AI startup, xAI, is poised to close a $5 billion debt financing led by Morgan Stanley, although investor demand has been notably modest, according to sources familiar with the matter. The debt package includes a floating-rate term loan, a fixed-rate loan, and secured bonds, with allocations scheduled for Wednesday.

The floating-rate loan carries an interest rate of 700 basis points above the Secured Overnight Financing Rate, while the fixed-rate loan and secured notes offer yields near 12%, significantly higher than the current 7.6% average yield for high-yield bonds. This elevated cost reflects the risks investors associate with xAI’s unrated debt and lack of profitability to date.

Several potential investors declined to participate, citing concerns over xAI’s financial transparency and Musk’s previous financing history. Notably, Musk’s 2022 $44 billion acquisition of Twitter involved $13 billion in loans that lenders had to retain on their balance sheets for two years due to poor secondary market demand.

While the debt issuance was fully subscribed, total orders amounted to roughly 1.5 times the amount offered, below the typical 2.5 to 3 times seen in similar junk bond offerings. Unlike Musk’s Twitter debt deal—where banks guaranteed the sale and committed capital—this transaction is structured as a “best efforts” deal with no such guarantees from Morgan Stanley.

Beyond debt, xAI is also reportedly pursuing a $20 billion equity raise that could value the company above $120 billion, with some investors estimating up to $200 billion.

10-Year Treasury Yield Dips Slightly as Traders Weigh Fed Officials’ Comments

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The yield on the 10-year U.S. Treasury saw a slight dip early Wednesday as bond traders processed recent remarks from Federal Reserve officials regarding the future of interest rates. As of 2:15 a.m. ET, the yield on the 10-year Treasury had fallen by over 1 basis point to 4.021%, while the 2-year Treasury yield was also down, dropping 1 basis point to 3.941%. Yields and bond prices move inversely, with one basis point equaling 0.01%.

The bond market reopened Tuesday following the Columbus Day holiday, and traders have since been grappling with mixed signals from various Fed representatives about the trajectory of monetary policy.

Mixed Messages from the Federal Reserve

On Monday, Minneapolis Fed President Neel Kashkari hinted that any future interest rate cuts would likely be “modest,” stressing that decisions will continue to hinge on incoming economic data. In a similar vein, Fed Governor Christopher Waller urged caution in reducing rates too soon, indicating that the economy is still showing signs of resilience.

However, on Tuesday, San Francisco Fed President Mary Daly took a different stance, suggesting that the Fed still has room to lower interest rates further. Daly highlighted that rates are still far from their “neutral” level, where the economy can stabilize without stimulating or restricting growth. She noted that this neutral rate could be higher than in previous economic cycles, implying that the process of adjusting rates downward may take longer than expected.

“We’re a long way from where it’s likely to settle,” Daly remarked, emphasizing the challenges in determining the speed at which rates will approach their neutral level. This uncertainty has led traders to cautiously adjust their positions in the bond market.

A Pause in Fed Activity

No Federal Reserve officials are scheduled to speak on Wednesday, and there are no major economic data releases expected. This temporary pause in public remarks allows bond traders to further digest recent statements and assess the broader economic landscape, particularly as they wait for future indicators that could offer more clarity on the Fed’s path forward.

Chinese Yuan Reaches 16-Month High Against US Dollar Amid PBOC Stimulus Measures

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China’s yuan surged to its highest level in over 16 months on Wednesday, boosted by a series of stimulus measures introduced by the People’s Bank of China (PBOC) to bolster the slowing economy. The offshore yuan briefly appreciated to 6.9946 per dollar, a level not seen since May 2023. Similarly, the onshore yuan traded at 7.0319 against the greenback, marking its strongest performance since last May.

While the yuan’s rise is seen as a positive outcome of the PBOC’s policies, analysts caution that a stronger currency could hurt China’s export sector. Wei Liang Chang, FX and credit strategist at DBS, warned that policymakers must be careful not to allow the renminbi’s appreciation to weigh on the fragile economy. “Weak growth and low inflation in China should put pressure on the RMB going forward,” noted Edmund Goh, head of China fixed income at abrdn.

Ben Emons, founder of Fed Watch Advisors, added that rapid yuan strengthening could add deflationary pressure to China’s exports, which are already under strain. Unlike the U.S. dollar or Japanese yen, the Chinese yuan operates within a controlled exchange rate system. Onshore yuan trades within a 2% range around the midpoint set by the PBOC, while offshore yuan—traded mainly in Hong Kong, Singapore, and New York—faces fewer restrictions, allowing for greater market influence.

Despite the upward momentum, some experts expect the offshore yuan (USDCNH) to dip below 7.0 in the coming months. Zerlina Zeng, head of Asia Credit Strategy at CreditSights, predicts that China’s pro-growth stance and potential easing from the Federal Reserve could lead to further yuan appreciation.

Tuesday’s announcement by the PBOC included key moves such as cutting the reserve requirement ratio (RRR) by 50 basis points and lowering the 7-day repo rate by 0.2 percentage points. PBOC Governor Pan Gongsheng described these actions as necessary to alleviate the “clogged” monetary transmission channel, hindered by the property sector’s drag on bank balance sheets and a resulting “crisis” in consumer confidence.

Following the central bank’s stimulus, China’s bond market saw increased demand, with 10-year and 30-year bond yields hitting record lows. Stronger bond demand generally strengthens a country’s currency, and Chinese bonds rallied accordingly. Yields on 10-year bonds rose by 5 basis points to 2.074%, while 30-year bond yields reached 2.182%.

Chinese equities also responded favorably. The Hang Seng Index in Hong Kong posted its best performance in seven months, while the CSI 300 Index on the mainland saw its largest one-day gain in over four years.