CDS revival? The "AI bond issuance boom" rekindles the market's "subprime memories".

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As technology companies prepare to borrow hundreds of billions of dollars for AI investment, banks and investors are increasingly seeking protective measures. Market participants have significantly increased trading of single-name credit default swaps (CDS) related to certain tech companies, a phenomenon reminiscent of market conditions prior to the financial crisis.

According to Bloomberg statistics, during the six weeks ending November 7, trading volume for Oracle-related credit default swaps jumped to about $4.2 billion, compared to less than $200 million in the same period last year. Since September, demand for credit protection on Oracle bonds has surged, making the cost of related credit derivatives more than double.

In contrast, several large AI-related bond issues by technology companies have recently entered the market, including Meta Platforms’ $30 billion note issued at the end of October—the largest U.S. corporate bond placement this year—as well as Oracle's $18 billion bond issued in September.

JPMorgan strategists estimate that technology companies could issue about $1.5 trillion in bonds over the next few years, a large portion of which will be used for AI-related investment.

Mega-cap companies become new CDS trading hotspots

According to Barclays, total trading volume of credit derivatives related to individual companies reached about $93 billion in the six weeks ending November 7, an increase of about 6% compared to the same period last year.

JPMorgan’s Co-Head of Global Investment Grade Financing, John Servidea, said:

We’re seeing renewed client interest in single-name CDS discussions, which had waned in recent years.

Mega-cap companies have very high ratings, but as borrowers, their growth has been tremendous; people have more exposure, so naturally there are more conversations about hedging with clients.

Several large AI-related bond issues have recently entered the market, including Meta Platforms’ $30 billion notes issued at the end of October—the largest U.S. corporate bond placement this year—as well as Oracle's $18 billion bond issued in September.

Banks become the biggest buyers of CDS

Traders say that banks are now the largest buyers of single-name CDS for tech companies, having significantly increased their exposure to technology company debt in recent months. Another source of derivative demand comes from equity investors, who are seeking relatively inexpensive hedging tools against stock price declines.

As of Friday, the cost to purchase five-year default protection on Oracle was about 1.03 percentage points, equivalent to paying about $103,000 per year to protect $10 million in bond principal. In contrast, buying a put option on Oracle stock with a nearly 20% drop by the end of next year costs about $2,196 per 100 shares, or about 9.9% of the protected stock value.

Meta Platforms’ credit default swaps became actively traded for the first time at the end of last month after its large-scale bond issuance. Derivative trading related to CoreWeave also started to become more active. CoreWeave’s stock plunged this Monday after the company lowered its annual revenue forecast due to delayed fulfillment of client contracts.

Sal Naro, Chief Investment Officer at Coherence Credit Strategies, believes the recent growth in single-name CDS trading is temporary:

Due to data center construction, there is a small spike in the CDS market for now.

It is worth noting that current CDS trading activity remains small compared to the expected influx of AI-related debt into the market.

Some analysts believe CDS trading is unlikely to return to pre-financial crisis levels, as there are now more hedging tools, including corporate bond ETFs, and credit markets have become more liquid with more bonds traded electronically.

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