Barclays has released a comprehensive report on the credit default swap (CDS) market for artificial intelligence-related companies, noting that with the substantial expansion of capital expenditure, the credit risk of AI-related enterprises has undergone significant repricing, with both CDS trading volumes and spreads showing sharp upward trends.
On October 29, the Barclays report pointed out that ten core AI companies, including hyperscale cloud service providers such as Google, Amazon, Meta, Microsoft, and Oracle, as well as chip manufacturers such as AMD, Broadcom, and Nvidia, currently account for only 8% of the CDX investment-grade index constituents, yet they already represent 16% of the index's implied credit risk.
Barclays emphasized that over the past six months, the credit risk of these ten companies has all widened, and they are all currently near the upper bound of their six-month volatility ranges.
AI Group: Current 5-Year CDS vs. Six-Month Range Comparison
This means that investors holding the investment-grade index have passively assumed a large amount of volatility risk in the AI sector. Additionally, the basis between CDS and cash bonds for these core AI companies has turned positive, meaning the cost of purchasing default protection now exceeds the additional yield from holding these companies' bonds.
According to Bloomberg, this anomalous phenomenon is primarily driven by a large number of institutions that do not hold the underlying bonds, such as equity funds and banks engaging in hedging, aggressively buying CDS to hedge enormous AI capital expenditure and related loan risks.
This technical anomaly is strikingly similar to 2008 in terms of the logic of credit hedging and basis distortion. Back then, a large number of institutions that did not hold subprime mortgage bonds, such as hedge funds and investment banks, bet on default risk by buying CDS protection out of macroeconomic bearishness or risk aversion. This intensive "naked hedging" derivative buying pushed CDS spreads extremely high, even exceeding the credit spreads of the underlying cash bonds themselves, directly driving the CDS-cash bond basis to turn positive.
At the time of Barclays' report, the financing needs of leading technology companies are continuously pressuring the market. Recently, Microsoft launched a bond issuance exceeding $25 billion, Amazon added over $48 billion in long-term debt in a single quarter, and Broadcom also plans to raise up to $21 billion in early next year.
These massive financings have further elevated market hedging demand, causing CDS costs for the relevant companies to hit historic highs.
Chipmaker Credit Characteristics Shift, Spreads Widen Sharply
In this wave of credit repricing, chipmakers have seen the most significant CDS spread widening.
Six months ago, the CDS spreads of Broadcom, AMD, and Nvidia were still at the lowest levels among their peer category, hovering around 40 basis points.
AI Group 5-Year CDS, Six Months Ago vs. Now, Ranked by Six-Month Change
However, today the CDS spreads of these three companies have jumped to the top ranks, with Broadcom's 5-year CDS surging 258% over six months, AMD rising 177%, and Nvidia rising 172%. By comparison, AAA-rated Microsoft rose only 20%.
Barclays noted in its report that as chip suppliers begin providing loans to customers to purchase their chips, known as supplier financing, the credit market has started to view these companies as lenders with highly concentrated loan books.
For example, after banks raised concerns about Anthropic's $63 billion chip deal, Broadcom stepped in to provide a guarantee. Based on this, Barclays recommends buying Broadcom's 5-year CDS protection as a macro strategy to hedge broader AI financing pressures.
Positive Basis and Hedging Demand Drive Surge in Trading Volume
The positive basis between CDS and cash bonds is the most prominent technical feature of the current AI credit market.
Over the past year, the basis for non-AI companies in the CDX investment-grade index has largely remained negative, meaning CDS spreads are lower than bond spreads. But the basis for the AI group has risen by approximately 50 basis points and turned positive. This positive basis is particularly pronounced among chipmakers and Oracle.
The CDS-Cash Bond Basis for the AI Group Has Now Turned Positive, While the Basis for the Non-AI Group Remains Negative
This structural change has been accompanied by explosive growth in trading volume. As of October 23, the 4-week average weekly trading volume for hyperscale cloud service providers reached approximately $6 billion, surging about 740% year-over-year; chipmakers' weekly trading volume reached $3 billion, soaring 1900% year-over-year.
CDS Trading Volumes for Hyperscale Cloud Service Providers and Semiconductor Companies Have Increased Significantly
Open interest data also confirms the continued inflow of capital. The net open interest notional value for hyperscale cloud service providers has doubled from approximately $5 billion a year ago to $20 billion, while chipmakers have increased from about $1.9 billion to $8.6 billion.
The AI Group's Open Interest Has Grown from Approximately $7 Billion a Year Ago to Over $28 Billion Currently
These ten AI companies now account for nearly 14% of all open interest in Americas single-name CDS, far higher than 4% a year ago.
Curve Shape Divergence, Trading Strategies Highlight Individual Stock Differences
Through analysis comparing the 3-year and 5-year spreads on CDS curves, Barclays identified pricing anomalies in individual companies.
For example, Amazon and Google have comparable 5-year CDS levels (80-81 basis points), but Amazon's 3s5s curve, the spread between 3-year and 5-year, is only 18 basis points, appearing excessively flat.
Absolute Values of the Current 3s5s CDS Curve, and as a Percentage of the 5-Year CDS
Barclays believes this may be related to buying pressure from Amazon's term loan in June, and recommends buying Amazon 5-year protection or constructing a steepener trade.
Earnings data subsequently confirmed the necessity of hedging, with Amazon reporting third-quarter free cash flow consumption of $33.5 billion and capital expenditure reaching $77.3 billion.
As the most liquid CDS reference in the market, Oracle's basis is at a high level within the sample.
Comparison of Current CDS-Cash Bond Basis Positions Within the One-Year Range
Barclays recommends selling Oracle's 5-year basis, meaning selling the 2032-maturing bonds while selling CDS protection, to bet on basis convergence. Previously, Oracle announced it would cap additional financing in the coming years at $20 billion.
Additionally, Intel is the only company in the sample whose basis remains negative at -14 basis points and whose curve is relatively steep, mainly because it has not deeply participated in the supplier financing model of its peers. But after weak earnings guidance was released, its stock price recorded its largest single-day decline since 1982.
A Microcosm of the High-Yield Market: CoreWeave's Default Protection Costs Remain Elevated
Outside of investment grade, CoreWeave, as the only directly relevant AI company CDS in the CDX high-yield index, has become a unique window for observing credit risk in data centers and new cloud service providers.
Currently, CoreWeave's 5-year CDS has adopted "points upfront" pricing, reaching 15.5 points. This pricing model, typically used for distressed debt, highlights the market's heightened vigilance toward its risk.
CoreWeave 5-Year CDS, Quoted in Points Upfront
Data shows that CoreWeave's weekly CDS trading volume has risen from $32 million a year ago to $302 million, with open interest increasing to $850 million.
CoreWeave's Weekly Trading Volume Has Risen from $32 Million a Year Ago to $302 Million, with Open Interest Increasing to $850 Million
Although some analysts maintain an "overweight" rating on CoreWeave's bonds, the elevated upfront cost of default protection at 15.5 points indicates that the CDS market is pricing in a more stringent assessment of the potential default risk of its business model.
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