Navigating the US Economy, Investors Assaying Private Credit Risks | Real Yield 2/27/2025
Speakers
Summary
- The Bond Market Disconnect: Despite hot PPI data, Treasuries are rallying (yields down). The consensus view is shifting toward bonds as a "flight to safety" amidst geopolitical tension and equity volatility, rather than purely on inflation fundamentals.
- Private Credit "Fat Tail" Risk: A collapse in UK-based MFS (bridging loans) has exposed cracks in private credit. Jamie Dimon explicitly warns that private credit has ~23% exposure to software companies, creating a "fat tail" risk that public markets (with only ~6-7% exposure) are underestimating.
- AI Capex Reality Check: While CoreWeave is raising $8.5 billion in debt backed by Meta, its equity valuation is under pressure due to massive cash burn ($30B-$35B capex). However, legacy hardware providers like Dell are seeing record backlogs ($43B) for AI servers, confirming the infrastructure spend is real even if the startups are burning cash.
- Labor Market Contrarian Call: Bloomberg Economics (Stuart Paul) predicts a negative downside surprise for the upcoming jobs report (consensus 60k), citing weather effects and employer-induced churn, which would be bullish for bonds.
Trade Ideas
Block (SQ) is cutting jobs to "bet on AI." Duolingo (DUOL) shares plunged after announcing a shift to AI investment at the expense of short-term monetization. Stuart Paul notes that "employer-induced churn" is rising. Companies are using AI as a rationale for cost-cutting or pivoting, but the market is punishing the transition costs (DUOL) and questioning the growth quality. WATCH. These stocks are currently "show me" stories where AI capex is hurting short-term margins. AI integration successfully re-accelerates growth faster than expected.
The MTA is threatening to sue the Trump administration over frozen funds ($60M) for the 2nd Avenue Subway. Federal funding delays for major infrastructure projects in "blue states" (NY/NJ Gateway) create uncertainty for the municipal bonds backing these projects and the construction firms contracted to build them. WATCH. Political gridlock is becoming a tangible cash-flow risk for NY-based infrastructure. Funding is released, removing the overhang.
CoreWeave is raising $8.5B in debt explicitly backed by Meta contracts. Dell reported AI server revenue topping expectations with a record $43B backlog. While CoreWeave's *equity* is risky due to burn rates, their *spending* is revenue for hardware providers. Meta's willingness to backstop CoreWeave's debt confirms their commitment to massive infrastructure build-outs, directly benefiting suppliers like Dell. LONG. The "picks and shovels" (Dell) and the "deep pockets" (Meta) are safer plays than the cash-burning middlemen (CoreWeave equity). AI overspending narrative gains traction; CoreWeave execution failure impacts partners.
UK lender MFS collapsed amid fraud allegations; TPG has £44M ($59M) exposure. Jamie Dimon warns that private credit portfolios have ~23% exposure to software companies, compared to <10% in public indices. The MFS collapse is a "canary in the coal mine." If software valuations compress or churn increases (as seen in Block/Duolingo), the collateral backing these private credit loans deteriorates. TPG is explicitly named as having exposure to the MFS fallout. AVOID. The "fat tail" risk in private credit is widening, specifically in portfolios heavy on software debt. The MFS issue remains idiosyncratic and contained to the UK bridging market.
Kelsey Berro
Fixed Income Portfolio Manager, JPMorgan Asset Management
Berro notes that shelter inflation (rents) and the "Indeed Wage Tracker" are at cycle lows, supporting a disinflation narrative. Rajappa adds that despite sticky inflation, the "path of least resistance" for yields is lower due to geopolitical flight-to-safety. Paul predicts a negative jobs print next week. If the labor market misses expectations significantly (Paul) and shelter costs continue to stagnate (Berro), the Fed's "higher for longer" narrative collapses. Investors are already hedging for a break below 4% on the 10-year. LONG. Duration is the hedge against the "hard landing" or "risk-off" scenario. Sticky inflation in services (healthcare/airfare) mentioned by Rajappa prevents the Fed from cutting.
Maureen O'Connor
Global Head of High Grade Debt Syndicate, Wells Fargo
Investment Grade (IG) credit spreads are diverging. While AI-exposed sectors are seeing spread pressure, non-cyclical sectors like Utilities, Pharma, and Energy are outperforming. In a wobble economy (wobbly credit/equity markets), capital flows to "defensive carry." Investors are seeking yield in sectors that are insulated from the software/AI volatility. LONG. High-quality, non-cyclical corporate debt offers safety relative to tech-heavy credit. A broad liquidity crunch widens spreads across all sectors simultaneously.
Up Next
This Bloomberg Markets video, published February 27, 2026, features Norah Mulinda, Michelle Kaske, Bailey Lipschultz, Constantine Courcoulas, Kelsey Berro, Maureen O'Connor discussing SQ, DUOL, ITB, META, DELL, BDC, BKLN, TPG, TLT, IEF, GOVT, XLU, XLV, XLE. 6 trade ideas extracted by AI with direction and confidence scoring.
Speakers: Norah Mulinda, Michelle Kaske, Bailey Lipschultz, Constantine Courcoulas, Kelsey Berro, Maureen O'Connor · Tickers: SQ, DUOL, ITB, META, DELL, BDC, BKLN, TPG, TLT, IEF, GOVT, XLU, XLV, XLE