Why are credit default swaps unnerving AI investors?
CRWV•Credit default swap costs for some AI-linked companies have risen sharply as investors question whether heavy spending on data centres and other infrastructure will generate returns quickly enough. CoreWeave’s swaps topped 1,100 basis points, implying a roughly 63% chance of default over five years, up from around 30% a year ago.
1. Credit concerns rise
Demand for credit default swaps tied to AI-linked companies has surged. CoreWeave, a heavily indebted data centre operator, saw its swaps top 1,100 basis points for the first time, with market data suggesting a roughly 63% chance of default over five years, compared with around 30% a year ago.
2. Spreads across tech
Oracle’s swaps have traded near 300 basis points, while Nvidia’s rose to around 90 basis points and Meta’s traded around 105. An investment-grade credit default swap index was around 62 basis points. None of the companies whose swap costs have risen recently has defaulted or signalled that it may do so.
3. How the market works
Credit default swaps provide protection against a bond issuer failing to meet debt obligations. The single-name CDS market is worth about $9 trillion, while average daily trading across the market reached $16 billion in the second quarter, up from $13 billion a year earlier. Rising protection costs can lead investors to sell bonds and raise issuers’ borrowing costs, potentially amplifying credit concerns.
