Key Takeaways
- Credit default swap trading on tech giants like Oracle has surged over 20x year-over-year
- Banks and investors are hedging against potential AI debt defaults amid $1.5 trillion borrowing spree
- Oracle CDS protection costs have more than doubled since September as exposure grows
Financial institutions are scrambling for protection as technology companies prepare to borrow hundreds of billions for artificial intelligence investments. Banks and money managers are increasingly trading credit derivatives that pay out if major tech firms default on their massive debt loads.
The demand for credit protection has more than doubled the cost of derivatives on Oracle’s bonds since September. Trading volume for credit default swaps tied to the company skyrocketed to approximately $4.2 billion during the six weeks ending November 7 – a dramatic increase from less than $200 million during the same period last year.
Renewed Interest in Single-Name CDS
“We’re seeing renewed interest from clients in single-name CDS discussions, which had waned in recent years,” said John Servidea, global co-head of investment-grade finance at JPMorgan Chase & Co. “Hyperscalers are highly rated, but they’ve really grown as borrowers and people have more exposure, so naturally there is more client dialogue on hedging.”
While current trading activity remains modest compared to the expected debt flood, the hedging demand signals tech companies’ growing dominance in capital markets. JPMorgan strategists project investment-grade companies could issue around $1.5 trillion in bonds coming years.
AI-Driven Bond Market Transformation
Recent weeks have seen massive AI-related bond sales, including Meta Platforms’ $30 billion offering in late October – the largest corporate issue this year in the US – and Oracle’s $18 billion September sale. Tech companies and AI-related borrowers have now displaced banks as the largest segment of the investment-grade market.
Major banks are among the biggest buyers of single-name credit default swaps on tech companies, as their exposure to the sector has surged recently. Equity investors are also using these derivatives as relatively inexpensive hedges against stock declines.
Protection against Oracle defaulting within five years currently costs about 1.03 percentage points, or approximately $103,000 annually per $10 million of bond principal protected. This compares favorably to equity put options, which might cost nearly 10% of the shares’ protected value.
Underlying Risks in AI Expansion
The hedging activity comes amid concerns about AI investments. An MIT initiative reported that 95% of organizations are seeing zero return from generative AI projects. While current borrowers have strong cash flows, the technology industry’s rapid evolution means today’s leaders could become tomorrow’s casualties.
Bonds that appear secure now might grow riskier over time, particularly if data center profits disappoint expectations. Recent market developments include active CDS trading on Meta Platforms following its massive bond sale and increased activity in CoreWeave derivatives after the AI computing provider cut its revenue forecast.
Market Perspective and Outlook
Sal Naro, CIO of Coherence Credit Strategies, views the CDS trading increase as temporary. “There’s a blip in the CDS market right now because of the data center build out,” said Naro, whose hedge fund manages $700 million. “Nothing would make me happier than to see the CDS market truly be revived.”
Despite this perspective, bank traders and strategists confirm activity continues rising. Overall volume for single-company credit derivatives increased approximately 6% year-over-year to about $93 billion during the six weeks ended November 7.
“Activity has picked up,” confirmed Dominique Toublan, head of US credit strategy at Barclays. “There’s definitely more interest.”
