Trading in credit default swaps (CDS) is experiencing a marked increase as investors seek to protect their portfolios from potential risks associated with the booming artificial intelligence (AI) sector. Data from the Depository Trust & Clearing Corporation (DTCC) reveals that volumes in these financial products, which provide payouts in the event of company defaults, have surged by 90% since early September, particularly concerning several major U.S. tech firms.
This upsurge occurs amid growing concerns regarding a spree of bond issuances by tech companies to fund AI infrastructure—investments that may take years to yield substantial returns. The urgency to hedge against possible defaults has intensified, especially following Wall Street’s renewed tech sell-off, which was triggered last week by disappointing earnings reports from notable players like Oracle and chipmaker Broadcom.
The fluctuations in both equity and debt of companies riding the tech wave have become increasingly evident, with traders closely monitoring earnings results and contemplating how AI solutions from OpenAI, Google, and Anthropic may impact the demand for technology resources such as chips and data centers. The trading of CDS has notably increased for Oracle and cloud computing provider CoreWeave, both of which are in the process of raising billions of dollars in debt to enhance their data center capabilities.
In a significant move, Meta has also introduced a new CDS market following its recent sale of $30 billion in bonds aimed at financing AI initiatives. CDS are utilized not only for default protection but also as a means to hedge against potential swings in bond prices.
Nathaniel Rosenbaum, an investment-grade credit strategist at JPMorgan, noted the significant uptick in single-name CDS volumes during the current quarter, particularly among hyperscalers developing large-scale data centers across the U.S. A senior executive from a leading U.S. credit investment firm echoed this sentiment, emphasizing that transactions involving CDS for major tech companies, including Oracle and Meta, have markedly increased. The expert highlighted that investors are increasingly seeking protection through baskets of technology CDS.
Earlier in the year, investor appetite for CDS linked to highly-rated U.S. companies was nearly non-existent, as many tech groups relied on their substantial cash reserves and healthy earnings to fund AI developments. However, this landscape shifted when companies turned to debt markets to address escalating costs. In total, Meta, Amazon, Alphabet, and Oracle have raised around $88 billion this autumn for AI ventures, with forecasts from JPMorgan suggesting that investment-grade companies might reach $1.5 trillion in total fundraising by 2030.
An investor from a specialized asset management firm observed a significant change in sentiment: “People went from thinking there is virtually no credit risk to thinking there is some risk depending on the name, and that warrants hedging.” For Oracle, which bears a lower credit rating compared to its investment-grade counterparts, weekly trading volumes of its CDS have more than tripled this year, and the cost of acquiring these derivatives has climbed to its highest level since 2009.
After releasing earnings that fell short of analysts’ expectations for the third quarter, Oracle’s shares and bonds faced a heavy sell-off, worsening after the company announced delays in the construction of at least one data center. While some analysts do not foresee Oracle defaulting anytime soon, concerns around the pricing of its CDS have emerged. Benedict Keim, a portfolio manager at Altana Wealth, highlighted that Oracle’s CDS were “egregiously mispriced,” leading the firm to place bets against Oracle based on its rising debt levels and heavy reliance on a single client—OpenAI.
Commenting on current market dynamics, Brij Khurana, another portfolio manager at Wellington, remarked that “single-name CDS are having a moment.” He noted that banks and private credit markets now possess substantial exposure to specific companies, prompting an increased desire to mitigate this risk. Investors are actively searching for ways to insure their holdings, making CDS an attractive option in today’s market environment.
