Trading volume in Credit Default Swaps (CDS) for single-name AI-related companies such as Alphabet, Amazon, CoreWeave, Meta, Microsoft, and Oracle has significantly increased this year, rising from approximately $3 billion weekly to over $8 billion. This surge in CDS activity, reminiscent of its role in the 2008 financial crisis, indicates investors are seeking protection against potential volatility in bond prices rather than anticipating defaults, as they already have substantial exposure to these companies' bonds and stocks. The cost of this protection is rising.
The heightened interest in CDS for these companies largely followed announcements between September and November regarding their plans for record-breaking borrowing to fund AI initiatives. Oracle's CDS, in particular, has seen its trading more than double this year, serving as a bellwether for investor anxiety regarding AI and associated borrowing. Investors' concerns revolve around the possibility that companies are borrowing heavily to build AI infrastructure that might ultimately prove unnecessary if their AI projects do not meet expectations.
Historically, the CDS market for these companies was illiquid, with some CDS contracts not even existing before these recent borrowing announcements. This illiquidity had made purchasing protection relatively inexpensive compared to, for instance, shorting stocks. While companies have not directly commented on the increased CDS activity, they are aware of and being questioned about their borrowing levels. This trend suggests investors are not divesting from AI bonds or stocks but are proactively seeking to hedge their exposure.
