Investors Rush to Buy AI Credit Default Swaps Amid Bubble Fears
Investors are heavily buying credit default swaps to hedge against a potential AI market bubble, pushing trading volumes and protection costs to record highs amid massive tech sector borrowing.
Investors are rushing to purchase credit default swaps (CDS) to protect their portfolios against a potential artificial intelligence market bubble, driving up trading volumes in a financial instrument that gained notoriety during the global financial crisis. The wave of borrowing designed to fund trillions of dollars in AI infrastructure investments is fueling demand for these derivatives, which act as insurance and pay out compensation if the underlying company defaults on its debt obligations.
According to Morgan Stanley Research, trading in CDS contracts on bonds of companies such as Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom, and Nvidia averaged over $9 billion per week in September, compared to less than $2 billion per week in July. Bloomberg data shows that trading volume in US corporate CDS indices since the beginning of the year has already surpassed the total volume for the entire previous year. The cost of CDS protection for many AI-related companies reached all-time highs this month, signaling growing investor unease over the borrowing binge.
"The CDS has become a leading indicator of investor sentiment toward hyperscaler financing and the AI trade in general," said Manish Kabra, head of US equity strategy at Société Générale. "The market is increasingly focusing on two things: CDS and free cash flow." AI-related debt issuances have surged this year, with Morgan Stanley reporting that companies raised approximately $466 billion since the beginning of 2026, compared to $101 billion over the same period in 2025, to fund infrastructure like data centers and chips.
While the pace of issuance has cooled from its June peak, investors note that sustained demand for CDS is driven by the large number of major borrowers exposed to AI risk and lingering concerns over companies' abilities to monetize their AI investments. Jim Caron, chief investment officer of portfolio solutions at Morgan Stanley Investment Management, noted that these contracts offer a cheap hedge for investors. While credit investors historically dominated the space, multi-asset portfolio managers and equity managers are increasingly utilizing CDS as an affordable way to hedge AI exposure.
The interconnected nature of financing within the AI industry has heightened bubble fears, leading investors to trade CDS on companies supplying computing infrastructure to OpenAI and Anthropic, such as Oracle and Alphabet. Meta's five-year CDS climbed to 108 basis points this month, meaning insuring $10 million of the company's debt against default costs $108,000 annually. Nvidia's derivatives rose to 101 basis points, both marking all-time highs. However, these figures remain low compared to riskier AI firms, with Oracle's CDS quoted at 322 basis points and SpaceX trading at a record 226 basis points.
The greatest market anxiety centers on AI cloud provider CoreWeave, whose bonds trade at distressed debt yields and whose five-year CDS trades around 1,090 basis points, reflecting profound uncertainty regarding recovery rates and systemic vulnerabilities across the tech sector.
