Stories
Why Credit Default Swaps Are Unnerving AI Investors Right Now
- •The cost of insuring against potential US tech defaults has surged to record levels, signaling growing credit stress in the artificial intelligence sector.
- •Investors are increasingly worried about when and if massive investments in data centres and AI infrastructure will yield profitable returns against a backdrop of rising interest rates.
- •Demand for credit default swaps has spiked even for major tech players like Apple, Amazon, and Microsoft, with heavily indebted suppliers facing even faster price increases.
- •Data centre operator CoreWeave has seen its CDS surpass 1,000 basis points, reflecting a roughly 63 percent chance of default over the next five years according to S&P Global Market Intelligence data.
- •While rising CDS costs offer insurance for bondholders, they can also push up borrowing costs and trigger a self-reinforcing cycle of credit concerns.
Key Questions Answered
A credit default swap (CDS) is a derivative that acts as insurance against the risk that a bond issuer fails to meet its debt obligations. Bond investors buy CDS through intermediaries to hedge against potential defaults or falling bond values. The buyer pays a periodic fee, or premium, to the seller, who assumes the risk of a credit event.
Demand for CDS has surged because investors and analysts have doubts about when, and if, billions of dollars poured into data centres and computer power will pay off. Rising interest rates and inflation have increased the cost of capital, making investors worried about whether heavily indebted companies can generate returns fast enough to service mounting interest costs.
Heavily indebted data centre operator CoreWeave has seen its CDS rise above 1,000 basis points, suggesting a roughly 63% chance of default over the next five years. Other major technology players have also experienced sharp increases, with Oracle trading near 300 basis points, Nvidia around 90 basis points, and Meta near 104 basis points.
