Investors are increasingly turning to credit default swaps (CDS) to protect against potential defaults by major tech companies heavily investing in artificial intelligence, signaling growing unease about the sustainability of the AI boom. Volumes in CDS tied to US tech groups have surged 90% since early September, according to DTCC data. This comes as Meta, Amazon, Alphabet, and Oracle collectively raised $88 billion this autumn for AI initiatives, with JPMorgan forecasting investment-grade companies could raise $1.5 trillion by 2030 for AI-related projects. The expansion of these hedging strategies highlights investor concerns that the massive bond deals by tech firms to finance AI infrastructure could face long timelines before yielding significant returns.
Prominent examples of this trend include Oracle and cloud computing company CoreWeave, both of which are securing billions in debt for data center capacity. Weekly trading volumes for Oracle's CDS have more than tripled this year, with the cost of these derivatives reaching its highest level since 2009. Altana Wealth, an asset manager, notably placed a bet against Oracle through its CDS in October, citing increasing debt levels and its reliance on OpenAI as a key customer. A new market for Meta's CDS also emerged after the company issued $30 billion in bonds in October to fund AI projects. While the total notional outstanding of single-name CDS is not considered significant in the grand scheme of trillions, it becomes meaningful when compared to corresponding bonds outstanding, as these companies recently issued almost $90 billion in bonds.
Financial analysts and investors note a shift in perception, moving from an assumption of virtually no credit risk for these tech giants to an acknowledgment of some risk that warrants hedging. JPMorgan's Nathaniel Rosenbaum highlighted the significant increase in single-name CDS volumes, particularly for "hyperscalers" building vast data centers. An executive at a large US credit investment firm observed an uptick in CDS trading for individual companies and baskets of big tech firms, specifically mentioning Oracle and Meta, as investors seek insurance on their holdings to mitigate risk. The rising cost of credit protection serves as a reminder to scrutinize not only the revenue potential of AI projects but also the allocation of gains and the bearing of energy, infrastructure, and debt risks.
