AI debt concerns fuel surge in credit default swap trading

Investors are flocking to credit default swaps (CDS) to safeguard against potential turbulence in the AI investment boom, according to a Financial Times report. CDS linked to debt issued by major tech firms including Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom and Nvidia saw an average weekly trading volume of $9 billion in September, a sharp increase from $2 billion in July, as reported by Morgan Stanley Research.

The surge in trading coincides with a significant rise in AI-related borrowing, with companies raising an estimated $466 billion in 2026, compared to $101 billion over the same period last year. Increased leverage, concentrated exposure, and uncertainty over the profitability of AI infrastructure investments have led to higher costs for default protection.

Demand for credit derivatives is also rising among multi-asset and equity investors as a cheaper alternative to equity put options for hedging technology exposure. Record high CDS spreads for Meta (108 basis points), Nvidia (101 basis points), and Oracle (322 basis points) were observed this month. SpaceX's CDS also hit a record 226 basis points.

The most significant deterioration has been seen in CoreWeave, with five-year CDS spreads reaching approximately 1,090 basis points. Investors face steep upfront costs of $1.82 million to secure $10 million worth of protection, coupled with quarterly payments of $125,000. Robert Dafforn, chief investment officer at Polus Capital, a distressed debt specialist, has cautioned that the high leverage and interconnected financing arrangements across the AI sector could magnify losses if weaker borrowers face difficulties.

The widening CDS spreads indicate growing apprehension about the sustainability of AI-related capital expenditures, with credit derivatives becoming a key indicator of investor sentiment towards the sector.