CDS trading volume nearly doubled! Investors seek to hedge against "AI debt risk"

As tech giants ramp up bond issuance for AI infrastructure, investors' concerns about potential debt risks are growing.

According to the latest data from the data clearing agency DTCC, since early September this year, the trading volume of credit default swaps (CDS) linked to a few American tech groups has surged by 90%. CDS is a financial instrument similar to insurance that provides protection to investors in the event of a company defaulting.

This hedge fund frenzy comes as Wall Street's sell-off of tech stocks intensifies due to disappointing earnings from companies like Oracle and Broadcom, which fell short of investors' high expectations.

Investor unease stems from a wave of bond issuance by tech companies to build AI infrastructure. These projects, which require substantial capital investment, may take years to yield returns, and their uncertainty is prompting investors to reassess the credit risks of the related companies and actively seek protective strategies.

AI Financing Shifts, Credit Market Becomes New Battleground

At the beginning of this year, credit risk was almost a non-issue for high-rated American tech companies. At that time, these companies primarily relied on their massive cash reserves and strong profitability to fund AI expenditures. However, the situation has changed as costs continue to rise.

Statistics show that this fall, Meta, Amazon, Alphabet, and Oracle collectively raised as much as $88 billion through bond issuance specifically for AI projects. JP Morgan predicts that by 2030, investment-grade companies could raise up to $1.5 trillion for AI projects. This shift from internal financing to external debt exposes the credit status of tech companies directly to the scrutiny of public market investors.

An investor from a professional asset management firm stated, "People's perception has shifted from thinking that tech companies have almost no credit risk to believing that certain companies have risks that need to be hedged." A direct manifestation of this sentiment shift is the rapid emergence of a new Meta CDS trading market after Meta issued $30 billion in bonds for AI projects in October.

Surge in CDS Trading, "Hyperscale" Companies in Focus

As tech companies increasingly tap into the debt market, CDS trading, especially single-name CDS, has seen a significant increase in volume.

Nathaniel Rosenbaum, an investment-grade credit strategist at JP Morgan, noted, "This quarter, the trading volume of single-name CDS has risen sharply, particularly among 'hyperscaler' companies that are building large data centers across the U.S."

An executive from a large U.S. credit investment firm echoed this sentiment, mentioning, "The trading of single-name CDS has significantly increased, with people increasingly using a basket of large tech companies' CDS or trading specifically on Oracle and Meta's CDS." He added, "How to protect oneself and establish a hedge? The most common way is through a basket of tech stocks' CDS."

The increase in trading activity is particularly evident in Oracle and cloud computing company CoreWeave, both of which are securing data center capacity through billions of dollars in debt financing

Oracle's Risk Exposure Raises Concerns, Hedging Costs Hit 15-Year High

Among the many tech giants, Oracle has become the focus of investors' attention. Compared to its investment-grade peers, Oracle has a lower credit rating, making it more vulnerable during market fluctuations.

Data shows that since the beginning of this year, Oracle's weekly CDS trading volume has more than doubled, and the cost of purchasing its CDS has surged to the highest level since 2009. Previously, Oracle reported third-quarter revenue that fell short of analysts' expectations and delayed the construction of at least one data center, leading to a deep sell-off of its stocks and bonds.

Asset management firm Altana Wealth is betting on Oracle's credit risk through CDS. The firm's portfolio manager, Benedict Keim, stated, "We do not believe Oracle will default anytime soon, but its CDS is severely mispriced." Altana's Mathieu Scemama added that after assessing Oracle's rising debt levels and its reliance on a single client—ChatGPT manufacturer OpenAI—they see this as a "readily available opportunity."

Investors Seek "Insurance," Individual Stock Credit Hedging is "Timely"

Current market dynamics indicate that individual stock CDS are entering an active period. Wellington's portfolio manager, Brij Khurana, stated, "Individual stock CDS are timely."

He explained that as banks and private credit institutions increase their risk exposure to individual companies, "they indeed want to mitigate this risk. People are looking for insurance for the assets they hold."

CDS can be used not only for default protection but also to hedge or bet on bond price fluctuations, providing investors with a flexible tool to manage risks during uncertain AI investment cycles