Explainer-Why are credit default swaps unnerving AI investors?

Credit default swaps (CDS) have surged to record levels, raising concerns among AI investors. These insurance-like contracts protect bond investors against the risk of default by a bond issuer. While AI-related tech stocks have been among the top performers this year, investor sentiment has turned in recent weeks as they grapple with the timing and profitability of the billions poured into data centers and infrastructure.

The cost of insuring against US tech defaults has hit a record high, reflecting rising concerns over the speed at which AI investments will generate returns. Oracle, Nvidia, Meta, and CoreWeave, a data center operator, have seen their CDS spreads widen significantly, indicating a higher perceived risk of default. The market for single-name CDS, which covers the bonds of individual issuers, is valued at around $9 trillion.

As bond investors demand higher premiums for CDS protection, it could lead to a self-reinforcing cycle of declining bond prices and rising borrowing costs for tech companies, potentially amplifying credit stress in the AI trade.