AI debt worries spark surge in default insurance trading

{"text":[[{"start":10.08,"text":"Investors are racing to buy credit default swaps to protect their portfolios in the event the AI boom unravels, sending trading volumes surging for an instrument that shot to prominence during the global financial crisis."}],[{"start":22.88,"text":"The wave of borrowing to finance trillions of dollars of AI infrastructure spending is fuelling demand for these insurance-like derivatives, which pay out if the company they are tied to defaults on its debt."}],[{"start":34.8,"text":"More than $9bn worth of CDS linked to bonds issued by Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom and Nvidia was traded on average each week in September, up from less than $2bn in July, according to Morgan Stanley Research."}],[{"start":51.654,"text":"US corporate CDS index trading volumes so far this year have overtaken last year’s total, according to Bloomberg data."}],[{"start":59.48,"text":"In a sign of investors’ increasing unease over the borrowing binge, the cost of buying CDS on many AI-linked companies has hit record highs this month."}],[{"start":69.04,"text":"This so-called spread has in recent days climbed not only for companies that investors judge as riskier, such as AI cloud-computing provider CoreWeave, but also for those such as Microsoft that are seen as relatively safe."}],[{"start":81.88,"text":"“CDS has become a key bellwether of investor sentiment towards hyperscaler funding and the broader AI trade,” said Manish Kabra, head of US equity strategy at Société Générale. “The market is increasingly focused on two things: CDS and free cash flow.”"}],[{"start":null,"text":"

"}],[{"start":98.84,"text":"AI-linked debt issuance has rocketed this year, with companies raising an estimated $466bn so far in 2026, up from $101bn in the same period in 2025, according to Morgan Stanley, to fund infrastructure such as data centres and chips."}],[{"start":116.6,"text":"While the volume of borrowing has slowed from its June peak, investors say the number of big borrowers exposed to AI risk and concerns over companies’ ability to make money from their AI investments are helping drive demand for CDS."}],[{"start":129.16,"text":"“Clearly when you’re in a market where the risk is very concentrated, what you want to buy is CDS,” said Jim Caron, chief investment officer of the portfolio solutions group at Morgan Stanley Investment Management, adding that these swaps were also a “cheap hedge” for investors."}],[{"start":null,"text":""}],[{"start":144.16,"text":"Traditionally the reserve of pure credit investors, multi-asset and equity managers are increasingly using these swaps as a cost-effective way to hedge their AI exposure, helping to push prices to record highs."}],[{"start":156.6,"text":"“One part [of demand] is a true bond investor who is looking to hedge their book. Another part is multi-asset and equity speculators who are trying to find a cheap hedge to their technology exposure,” said Morgan Stanley’s Caron."}],[{"start":169.24,"text":"The interdependent nature of the AI sector’s finances has added to fears of a bubble. That had prompted investors to trade CDS on companies that supply computing infrastructure to OpenAI and Anthropic such as Oracle and Alphabet, investors said."}],[{"start":184.04,"text":"“There is a complexity premium being priced into these tech names,” said Gavan Nolan, an executive director at S&P Global Market Intelligence, referring to the sector’s complex and interlinked financing. He added that large intraday swings in CDS spreads were a sign of “the uncertainty that is out there”."}],[{"start":202.48,"text":"Five-year Meta CDS has this month climbed to 108 basis points, meaning it costs $108,000 a year to insure $10mn of debt against default, while derivatives tied to Nvidia have climbed to 101bp, both of which are record highs."}],[{"start":219.12,"text":"The price of protection against default at Alphabet and Amazon is also at all-time peaks."}],[{"start":null,"text":""}],[{"start":224.52,"text":"But while the price of some tech giants’ CDS is on the rise, it is still relatively low compared with spreads on the AI companies investors deem riskier, for instance because of high debt levels."}],[{"start":235.32,"text":"Oracle’s CDS was quoted at 322bp on Monday, up from 144bp at the start of the year. CDS on Elon Musk’s SpaceX traded at a record 226bp at the start of the week, up from 110bp when it first began trading in late June."}],[{"start":254.1,"text":"Many investors see the derivatives as a relatively cheap and straightforward way of protecting themselves against a blow-up."}],[{"start":260.6,"text":"“Either you buy CDS or you buy equity put options, and sometimes these stocks can be extremely volatile. Hedging something that is much more volatile is extremely difficult in the equity space. It’s extremely expensive,” Kabra at Société Générale added."}],[{"start":275.24,"text":"Robert Dafforn, chief investment officer of London-based distressed debt specialist Polus Capital, pointed to “very highly levered” borrowing in the sector. “You know there is going to be a lot of misallocation” of capital."}],[{"start":null,"text":""}],[{"start":287.84,"text":"Dafforn added that the level of circularity within the financial system driving AI’s advancement meant that “whatever the weakest link is will actually start to deteriorate the system”."}],[{"start":298.2,"text":"By far the most concern in the market centres on neocloud CoreWeave, some of whose bonds have sold down into distressed territory. The five-year CDS tied to the company’s debt is trading at about 1,090bp, with demand so high that a purchaser of $10mn of protection would need to pay $1.82mn upfront, with additional quarterly payments of $125,000."}],[{"start":323.32,"text":"“Once a name trades over 1,000bp . . . the pricing of the expected recovery [of bondholders’ principal] starts to take over,” Nolan at S&P Global added."}],[{"start":323.82,"text":"Additional reporting by Ian Smith in London"}],[{"start":330.68,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1792488019_7838.mp3"}