Dear Reader,
I want to talk about what’s been happening underneath the surface in the credit markets.
Because while everyone was focused on the inflation report last week, those of us watching the bond market were witnessing something else entirely.
The data center trade is starting to deflate.
The Warning Signs I’ve Been Watching
I’ve said many times on this channel — you can always tell the end of a bull market by the quality of paper being sold.
In the nineties, the paper was dot-com IPOs.
Pets.com goes public. Two weeks later, the bubble pops.
In the 2000s, the paper was collateralized mortgages.
No-income loans. Pooled garbage wrapped up and sold as safe investments.
The paper today that worries me most is data center debt.
And I’ve said for months that there are two warning signs to watch for in the AI trade.
One: hyperscaler spending slows down.
Two: companies can’t raise money anymore. Nobody wants their paper. Creditors balk. Or they charge rates so high that new projects become unsustainable.
Last week, we started to see the second one.
What’s Actually Happening
CoreWeave’s credit hit a 60% odds-of-default rating last week.
Their bonds sold down to 80 cents on the dollar — distressed territory — pushing yields toward 15%.
Their stock fell 17%.
Rival Nebius lost 18%.
Even the stronger names are feeling it.
A Blue Owl and Meta-backed vehicle funding the Hyperion project is trading around 92 cents.
Bonds backing Hut 8 data center projects in Louisiana and Texas — set to be leased by Nvidia — have fallen to 92 to 94 cents.
Bonds backing a Blackstone-owned data center in Georgia dubbed Project Excalibur — set to be leased to Microsoft — have slipped below 88 cents on the dollar.
The weakest credits are having their Darwin moment.
Why I Think This Is Actually Healthy
Here’s where I want to push back against the panic narrative.
What you’re seeing in the data center debt market right now is fiscal discipline being imposed by the market itself.
This is how it’s supposed to work.
When rates are suppressed too low for too long, it encourages gambling.
Stupid behavior.
Misallocation of capital.
Think about crypto.
Trillions of dollars chased something with zero productive use.
If that money had gone into something with a real return on investment, we’d all be better off.
The same dynamic has been playing out in data center debt.
A lot of highly leveraged companies built a lot of infrastructure on the assumption that cheap money would last forever.
Debt is financial heroin.
I’ve watched it take otherwise brilliant people and blow them up.
They get big fast. Then they collapse fast.
And when the tide goes out, as Buffett says, you see who’s been swimming naked.
What This Means for You
We are not pulling out the full bear market playbook.
Earnings are too strong for that.
But here’s my practical advice for right now.
Don’t do stupid trades.
Avoid the dumb stuff.
Swing at pitches in your strike zone.
If you own CoreWeave or Nebius — we’ve never recommended either here, precisely because they’re built on debt — this is a moment to think carefully about your exposure.
If you have data center stocks that are well-capitalized, with real earnings and real customers, those are a very different conversation.
The hyperscaler-backed deals are holding up better.
The highly leveraged speculative names are getting hit.
That’s the market doing its job.
What’s Coming This Week
We have a very busy week ahead.
I’ll be talking about the AI trade extensively.
And I have some information from people close to Anthropic’s current investor roadshow — what they’ve been showing investors behind closed doors — that I think you’re going to find very interesting.
For now, the safest and best way to play the AI trade is to own the company that benefits no matter who wins the AI race.
The type of company that will continue to make money regardless of whether or not a speculative start-up defaults on their credit…
Stay tuned.
I’ll see you tomorrow.
“The Buck Stops Here,”
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Written by Dylan Jovine