- Investors are buying protection against an AI bust. Excluding CoreWeave, the net notional value of AI-related credit-default swaps has climbed to nearly $30 billion, up from under $7 billion a year ago, according to a Barclays report cited by the Financial Times.
- AI names now dominate the market. The 10 main hyperscaler and semiconductor companies tracked by Barclays account for almost 14% of the entire US single-name CDS market, up from 4% a year earlier, and their share of single-name CDS trading volume has quadrupled to about 20%.
- Oracle is the biggest. Oracle is now the largest and most active corner of the US CDS market, with four-week average weekly trading volume of $2.3 billion, more than twice that of Broadcom, Nvidia or Alphabet, and open interest of nearly $7 billion, despite still being rated investment grade.
- Protection costs are rising. Nvidia’s five-year CDS is quoted at 141.5 basis points, meaning it costs $141,500 a year to insure $10 million of debt, the FT noted. Broadcom, Oracle and SpaceX CDS have climbed even higher, while CoreWeave is in a category of its own.
What Happened?
Credit-default swaps work like insurance contracts that pay out if a borrower defaults, and they can be traded by investors who don’t own the underlying debt. Many big tech companies did not even have actively traded CDS a few years ago, but trading took off this summer as the wave of borrowing to fund AI infrastructure drove investors to hedge, according to the FT.
Why It Matters?
Outside of CoreWeave, CDS prices are not signaling serious near-term credit concerns, but rising open interest, trading volumes and prices show investors are becoming nervous about AI borrowers. Barclays also found CDS are pricing in more risk than these companies’ bonds, creating a positive “basis” that is especially high for Oracle, Broadcom and AMD and that some investors may try to exploit. The CDS market now gives a real-time read on how credit investors view the AI buildout.
What’s Next?
Watch Oracle’s CDS after its $10 billion bond sale and $9.9 billion share sale this week, reported by Bloomberg, and whether protection costs keep rising as more AI-linked debt comes to market. Any widening in the CDS-bond basis or jump in CoreWeave’s spreads would be an early warning sign for AI credit.
Affected Tickers and Coins: ORCL, NVDA, AVGO, GOOGL, AMD, CRWV
Source: Financial Times, Bloomberg
