Wall Street Hedges AI Debt Risk as Big Tech CDS Trading Jumps by $7 Billion

CDS on Seven Companies Including Nvidia and Alphabet

Trading Volume Up $7 Billion in Two Months

Trading in credit-default swaps tied to the default risk of U.S. big tech companies has surged. As debt burdens grow with rising artificial intelligence investment, investors are moving to hedge risks tied to those companies' cash flow and the profitability of AI spending.

The Financial Times reported on Oct. 20 that trading in CDS linked to bonds issued by AI-related companies is increasing. Morgan Stanley estimated that weekly average CDS trading tied to bonds from seven companies — Nvidia, Alphabet, Amazon, Meta, Broadcom, SpaceX and Oracle — rose from less than $2 billion in July to more than $9 billion in September.

A CDS is a credit derivative that functions like insurance, paying out when a company defaults on its debt. The instruments drew attention as a key warning signal for financial-market stress during the 2008 global financial crisis.

The surge in CDS trading comes as borrowing rises to fund AI infrastructure. Morgan Stanley said AI-related companies raised $466 billion this year, more than four times the $101 billion raised in the same period last year. Costs are climbing rapidly for data-center construction and semiconductor purchases needed to build out AI infrastructure. Questions are also growing over whether that spending will translate into returns.

CDS spreads, the fee paid for that protection, have also climbed to record levels for tech companies. Meta's five-year CDS spread rose to 1.08 percentage points this month. That means it costs $108,000 a year to insure $10 million of default risk. Nvidia's CDS spread also climbed to 1.01 percentage points.

CDS spreads have risen even more sharply for companies with larger debt loads. Oracle's CDS spread stood at 3.22 percentage points as of Oct. 19, more than double 1.44 percentage points at the start of the year.

CDS on Elon Musk-led SpaceX also hit a record 2.26 percentage points. That was more than double the 1.10 percentage points when trading began at the end of June. CoreWeave, which has drawn the greatest concern in the market, is trading at about 10.90 percentage points for five-year CDS spreads. The moves show investors are pricing risk differently depending on each company's financial health.

"CDS is a relatively cheap hedging tool when AI risk is concentrated in specific companies and industries," Jim Caron, chief investment officer of the Portfolio Solutions Group at Morgan Stanley Investment Management, said.

Hwang Jeong-su, New York correspondent, Korea Economic Daily, hjs@hankyung.com