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 expenditures, credit risks for AI-related enterprises have undergone significant repricing, with both CDS trading volumes and spreads showing sharp upward trends.
On October 29, the Barclays report pointed out that 10 core AI companies 鈥?including hyperscale cloud service providers such as Google, Amazon, Meta, Microsoft, and Oracle, as well as chip manufacturers like AMD, Broadcom, and Nvidia 鈥?currently account for only 8% of the CDX Investment Grade Index constituents, yet already represent 16% of the index's implied credit risk.
Barclays emphasized that over the past six months, credit risk for all ten of these companies has widened, and all are now near the upper bound of their six-month volatility ranges. This means investors holding the investment-grade index have passively absorbed a substantial amount of AI-sector volatility risk.
Furthermore, the basis between CDS and cash bonds for these core AI enterprises has turned positive, meaning the cost of purchasing default protection now exceeds the extra yield gained from holding these companies' bonds.
According to Bloomberg, this anomaly is primarily driven by a large number of institutions that do not hold the underlying bonds 鈥?such as equity funds and banks engaging in hedging 鈥?aggressively buying CDS to hedge enormous AI capital expenditure and related loan risks.
This technical anomaly bears striking resemblance 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 鈥?such as hedge funds and investment banks 鈥?bought CDS protection to bet on default risk, driven by macro bearishness or risk aversion. This intense wave of "naked hedging" derivatives buying pushed CDS spreads extremely high, even exceeding the credit spreads of the underlying cash bonds themselves, directly driving the CDS-cash bond basis into positive territory.
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