Inflation accelerated in recent weeks, stocks fell, and long-term interest rates came down anyway. The 10-year Treasury yield dropped below 5% after falling 19 basis points in a single session, in a month when consumer prices ran at 3.7% and climbing.
Money leaving AI and tech stocks moved into Treasuries faster than the inflation data could push yields the other way. Strategists call the loop reflexive: what’s creating the equity problem is helping solve the rates problem.
This all could make a good argument for sitting out until things settle down. Author Steven Pressfield has written for years about that instinct, something he calls Resistance. His answer to it is blunt: it’s better to be in the arena getting stomped by the bull, than up in the stands or out in the parking lot.
A step into the arena is what a hero’s journey is built on, and it’s the same decision a lender makes on every file. Let’s look at what pulled rates down, where the AI buildout goes from here, how banks are sorting small-business borrowers, and what all of it means for the companies we fund.
A Bid for Bonds
Money left technology in a hurry after Meta and Tesla both posted their third-quarter earnings. Neither showed a business in trouble, but investors sold both stocks anyway, based on what the reports said about AI spending and how long the payoff will take. The Nasdaq fell 2.6% on October 22nd, its largest single-day drop since June.
A lot of that money went into Treasuries. The 30-year came down alongside the 10-year, and the yen strengthened as traders unwound the borrowed-yen positions they’d been using to buy U.S. assets. Gold and silver fell right along with stocks, when a real flight to safety usually lifts them.
Long-term interest rates track what investors expect from the economy years out, so one month’s inflation report has limited pull on them. Higher inflation would normally push those rates up, but they fell instead. The bigger worry right now is that growth slows. Energy costs tied to the conflict with Iran drove September’s acceleration, and the bond market looked straight past it.
The Bill for the Buildout
Meta is building AI data centers faster than it can pay for them. Revenue grew 26% last quarter while capital spending nearly doubled, and free cash flow went from positive to negative. The company also announced a new class of non-voting shares it can issue later to help pay for it, and investors took the stock down nearly 7%.
Tesla went the other way, cutting its capital spending plan for the year and saying it would fund most of what remains out of operating cash flow. Both have a profitable business to fall back on. Companies built only for AI don’t, so the whole buildout goes on borrowed money.
CoreWeave rents computing power to AI developers and has borrowed heavily to build it. Its credit default swaps hit distress levels in October, and its bond yields have held near 15%, the range where lenders price real doubt about getting paid back. The strain has spread to other specialized AI cloud providers and also to the chip and memory suppliers that sell into them.
The market spent the past few years asking whether AI would work. The question now is who pays for the buildout and when the money comes back, making it a credit question as much as a tech one.
Sorting the Loan Book
Banks are getting choosier about which small businesses they lend to. The Kansas City Fed’s small business lending survey found a net 8% of banks tightened credit standards in the second quarter, with about 73% of respondents naming a weaker or more uncertain economy as an important reason for doing it.
The businesses applying got weaker at the same time. A net 7% of banks reported a decline in applicant credit quality, continuing a slide that started back in the second quarter of 2022.
Credit kept moving anyway. New loan balances rose 8.5% from a year earlier, and approval rates at small and midsized banks went up. All of that predates the September hike, which took prime to 7% and pushed short-term small-business rates past 8%, the kind of credit small firms lean on most.
None of that means banks are backing away from small business, but it does mean they’re drawing a sharper line inside it. A K-shaped economy means one part of the country pulls ahead while another falls behind, and at the loan committee that becomes two kinds of small-business borrowers in the same pipeline.
The Customer’s Customer
Plenty of the companies a bank sorts out are perfectly good businesses. A company whose margins got squeezed by higher fuel and input costs, or whose credit looks worse on paper than it did a year ago, can still ship every week to customers who pay on time.
Factoring underwrites whoever owes the invoice. The question is whether that company pays its bills on time, something a lender can check today. Weak financials on the borrower don’t change whether its customer pays this month.
Community banks see more of these companies than anyone. They lend to small businesses more heavily than the big institutions do, which is why loan demand in the survey rose at small and midsized banks while it fell at large ones. Back Room Services exists so a bank can fund that kind of deal without loosening its own credit standards.
The structure is C&I lending underwritten against commercial receivables, with daily collateral monitoring and weekly reporting, and Dare’s default rates run in line with what banks already carry on their C&I books. The facility books in the bank’s name and the customer never leaves, with Dare running the underwriting and servicing behind it.
The Cost of Waiting
Rates could keep falling from here, or the next inflation print could push them back up. The AI buildout could steady itself or keep getting repriced, and banks could stay choosy or loosen up. None of that tells a lender what to do about the company sitting in front of them this week.
Waiting is the comfortable answer, but it isn’t free. Setting a file aside is a decision, even when it doesn’t feel like one. The cost shows up later as a customer who went somewhere else and got what they needed.
Pressfield’s point about Resistance is that it never shows up as fear. It shows up as good judgment, as a reasonable case for holding off until the picture is clearer. Nothing bad happens in the parking lot, but nothing else does either.
Where does your bank draw the line right now?
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