Credit markets are reflecting growing stress. The cost of insuring against defaults on the debt of several AI-linked firms has reached record levels. This insurance is provided through a credit default swap (CDS), where the buyer pays an annual premium and receives a substantial payout if the borrower defaults or fails to meet payment obligations. The premium, or spread, is measured in basis points—100 basis points equates to $100,000 annually for insuring $10 million of debt. A wider spread signals heightened investor compensation demands for assumed credit risk.
The intense demand for CDS is evident in trading volumes. Per Morgan Stanley data, weekly CDS trading linked to bonds from Oracle (ORCL), SpaceX , Alphabet , Amazon , Meta , Broadcom (AVGO), and Nvidia averaged over $9 billion in trading during September, a sharp increase from under $2 billion weekly in July.
The situation grows especially precarious for highly leveraged firms. While unnamed, Biemann noted that one infrastructure company dependent on external financing has accumulated tens of billions in debt obligations. Its five-year CDS spread surged to 1,100 basis points, making $1 million annually the cost to insure $10 million of its debt.
