Explainer: Why are credit default swaps unnerving AI investors?

Apple

15/10/2026 15:03

    (Updates prices)
    By Amanda Cooper
       LONDON, Oct 15 (Reuters) - The cost of insuring against
the risk of potential US tech defaults has hit record levels, in
the latest sign of credit stress building in the so-called AI
trade, especially for data centre operators like CoreWeave
 CRWV.O  that depend on future revenue.
    Although shares in companies driving the AI boom are still
among the biggest gainers on global equity markets this year,
many have fallen sharply in the past few weeks, as investors
reassess the cost of capital against a backdrop of rising
interest rates and inflation.
     There are also doubts among some investors and analysts
about when, and in some cases, if, the billions of dollars
pouring into data centres, computer power and other
infrastructure will pay off. 
    Demand for AI-linked credit default swaps (CDS), a form of
insurance against default that gained prominence during the 2008
financial crisis, meanwhile has soared, even for heavyweights
like Apple  AAPL.O , Amazon  AMZN.O  and Microsoft  MSFT.O .
    For some of their more heavily indebted competitors,
suppliers and customers the cost of CDS has risen even faster.
     
    WHAT IS A CDS?
    A derivative that provides protection against the risk that
a bond issuer, whether a company or government, fails to meet
its debt obligations.
    Bond investors expect to receive interest payments and
repayment of principal when a bond matures, but they bear the
risk that those payments may not be made.
    Buying CDS helps investors hedge that risk by effectively
providing insurance against a default or other credit event. If
the value of a bond drops for any reason, an investor might add
to their CDS holdings to help offset that, for example.
    None of the companies whose CDS have risen recently have
defaulted on their obligations or signalled that they may do so.
     
    IS THIS A BIG MARKET?
    The market for single-name CDS, which cover the bonds of a
single issuer, is worth about $9 trillion, the International
Swaps and Derivatives Association (ISDA) said.
    That is a small portion of global bond markets, which have
more than $150 trillion of debt securities outstanding, Bank for
International Settlements data shows.
    The biggest CDS market is for government debt. 
    Average daily CDS trading across the market was $16 billion
in the second quarter, up from $13 billion a year earlier, the
most recent data from the Depository Trust & Clearing
Corporation shows. Saudi Arabia is the most actively traded.
    But average daily trades, even for large companies, can
sometimes be in the single digits, or fewer than 10 a day,
meaning small transactions can have an outsized impact on
prices.
     
    WHO BUYS CDS?
    Bond investors typically buy CDS through an intermediary,
often an investment bank, which then finds a financial firm to
issue an insurance policy on the bonds. These are
"over-the-counter" deals that do not go through a central
clearing house.
    Hedge funds also participate in the market, selling CDS to
investors seeking to hedge exposure.
    The buyer pays a fee, called a premium, at regular intervals
to the seller, which assumes the risk of a credit event.     
    CDS are quoted as a credit spread, which is the number of
basis points (bps) that the seller of the derivative charges the
buyer for providing protection. The higher the perceived risk of
a credit event, the wider the spread.    
    A CDS quoted at 100 bps costs $1 annually to insure every
$100 of debt.
     
    WHAT'S GOING ON WITH TECH CDS?
    CDS for CoreWeave, a heavily indebted data centre operator
at the eye of the current storm, have now topped 1,100 bps for
the first time, S&P Global Market Intelligence data show.
    They suggest a roughly 63% chance of a default over the next
five years, up from around 30% a year ago.
    Tech CDS moves reflect investor concern over how quickly
massive investments in AI will translate into profits, and
whether heavily indebted companies can generate returns fast
enough to service mounting interest costs.
    Oracle  ORCL.N  has seen its CDS trade at nearly 300 bps,
well above those of other AI-linked companies.
     Nvidia  NVDA.O  CDS have also risen sharply in recent weeks
to around 90 bps, Meta CDS  META.O  are trading around 105 bps. 
    By comparison, an index of investment-grade CDS is trading
around 62 bps  CDXIG5Y=MG .
     
    WHAT TRIGGERS A CDS PAYOUT?
    A CDS pays out following a credit event, which can include a
bankruptcy or a failure by an issuer to make bond payments.
    When concerns about an issuer's creditworthiness increase,
demand for protection typically rises, widening CDS spreads.
    Payouts are not a given. When Swiss lender Credit Suisse
collapsed and was taken over by rival UBS  UBSG.S  in 2023, the
EMEA Credit Derivatives Determinations Committee (CDDC) ruled
that event would not trigger a CDS payout. 
     
    IF IT'S INSURANCE, WHAT'S THE PROBLEM?
    CDS provide a hedge for bondholders. But rising perceived
risk pushes up the cost of protection, which can prompt
investors to sell bonds and raise borrowing costs for issuers.
    That can amplify concerns about creditworthiness and
potentially create a self-reinforcing cycle. 

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    (Reporting by Amanda Cooper; Editing by Dhara Ranasinghe,
Alexander Smith and Susan Fenton)
 ((amanda.cooper@thomsonreuters.com; +442031978531; Bluesky: https://bsky.app/profile/acoops.bsky.social))