CDS revival? The "AI bond issuance wave" reignites the market's "subprime memories"

As technology companies prepare to borrow hundreds of billions of dollars for AI investments, banks and investors are increasingly seeking protective measures. Market participants have significantly increased trading in individual technology company credit default swaps (CDS), reminiscent of market conditions before the financial crisis.

According to Bloomberg statistics, in the six weeks ending November 7, the trading volume of Oracle-related credit default swaps surged to approximately $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 skyrocketed, causing the cost of related credit derivatives to more than double.

In contrast, several recent large bond issuances related to AI have entered the market, including Meta Platforms' issuance of $30 billion in notes at the end of October—this is the largest corporate bond issuance in the U.S. this year—and Oracle's issuance of $18 billion in bonds in September.

JP Morgan strategists expect that technology companies may issue about $1.5 trillion in bonds over the next few years, a significant portion of which will be used for AI-related investments.

Mega-Cap Companies Become New Hotspot for CDS Trading

Barclays data shows that in the six weeks ending November 7, the total trading volume of credit derivatives related to individual companies increased by about 6% compared to the same period last year, reaching approximately $93 billion.

John Servidea, co-head of global investment-grade financing at JP Morgan, stated:

We are seeing renewed interest from clients in single-name CDS discussions, which had diminished in recent years.

Mega-cap companies are highly rated, but they have really grown a lot as borrowers, and people have more exposure, so naturally, there will be more client conversations about hedging.

Several recent large bond issuances related to AI have entered the market, including Meta Platforms' issuance of $30 billion in notes at the end of October—this is the largest corporate bond issuance in the U.S. this year—and Oracle's issuance of $18 billion in bonds in September.

Banks Become the Largest Buyers of CDS

Traders say that the largest buyers of single-name credit default swaps for technology companies are now banks, which have significantly increased their exposure to technology companies in recent months. Another source of demand for derivatives comes from equity investors seeking relatively cheap hedging tools to guard against stock price declines.

As of Friday, the cost of purchasing protection against Oracle defaulting within the next five years was about 1.03 percentage points, equivalent to approximately $103,000 per year for every $10 million in bond principal protected. In contrast, purchasing put options for Oracle stock to fall nearly 20% by the end of next year costs about $2,196 per 100 shares, which is about 9.9% of the value of the protected stock.

Credit default swaps related to Meta Platforms began active trading for the first time at the end of last month following its large bond issuance. Derivative trading related to CoreWeave has also become more active. CoreWeave's stock price plummeted this Monday after the company lowered its annual revenue forecast due to delays in customer contract fulfillment

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

Due to data center construction, the CDS market is currently experiencing a small peak.

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

Some analysts believe that related CDS trading is unlikely to return to pre-financial crisis levels, as there are now more hedging tools available, including corporate bond exchange-traded funds, and the credit market itself has become more liquid with the increased electronic trading of bonds