Credit default swap (CDS) demand is surging throughout the AI industry. Five years of default protection on $10 million of Nvidia debt now costs about $82,000 a year — double since the start of July when it cost roughly $40,000.
CDS spreads are deteriorating rapidly across mega-cap AI stocks including Alphabet, Amazon, Meta, Broadcom, and SpaceX, which all hit record spreads this week.
Alphabet CDS contracts traded up to 67 basis points days after reporting its first negative quarterly free cash flow since its 2004 listing.
Investors refer to the “price” of a CDS by its basis point spread above the notional amount of debt it guarantees.
A basis point is one hundredth of a percentage point, and the higher they “spread” above the notional quantity of debt, the more investors have to pay as a de facto insurance premium.
Companies want their CDS contracts to be cheap. When basis points are low, investors aren’t bidding extra for the right to receive a payout in the event of a credit default. Low basis points on CDS contracts — or even better, no CDS demand at all — indicate confidence that the company will service its debt on-time and in full.
Insurance premium doubles to protect Nvidia credit
Unfortunately, Nvidia’s five-year CDS contracts reached a record 82 basis points on Monday.
Monday’s jump of roughly 14 basis points was the largest single-day move since those Nvidia CDS contracts began trading in November 2025, ICE Data Services reported.
The $330 billion AI company Oracle carries an even worse premium. Its five-year CDSs traded above 215 basis points this week, up from 145 at the end of last year.
S&P Global cut the company’s creditworthiness rating to BBB- earlier this month, the lowest rung of its investment grade band.
Oracle’s bonds that mature in 2056 and pay 6.7% interest widened eight basis points on Monday to 263 basis points over US Treasuries. Not good.
Even worse, CoreWeave topped 855 basis points on Tuesday. A popular CDS pricing model reads that as roughly a 50% chance of default within five years.
Disturbingly, the instruments themselves have become an unfortunate growth market for Wall Street.
CDS for AI stocks shouldn’t be a growth sector
AI companies and tech stocks accounted for nearly $650 million of second-quarter corporate CDS trading, DTCC data shows. That is up 20% on the first quarter and almost 600% year on year.
The spike in CDS spreads this week followed a Bloomberg report that Nvidia is preparing AI commitments potentially worth more than $750 billion.
Those include a partnership with SK Group valued above $500 billion and talks over a guarantee of as much as $250 billion to help OpenAI lease computing capacity.
Doubt about its ability to service that debt sent CDS rates higher.
The slow-motion ‘bank run’ in private credit
CDS trader Michael Burry posted, “There is a reason Nvidia’s five-year credit default swaps are going parabolic.”
The short-seller blamed circular spending, i.e. companies buying services from one another in order to manufacture higher revenue for fundraising purposes.
Credit ratings agency Moody’s has already warned that unprecedented AI spending threatens the credit quality of Microsoft, Amazon, Alphabet, Meta, Oracle and CoreWeave.
Direct debt across those six names is worth roughly $460 billion. Land, office, and data center lease commitments add another $1.2 trillion.
The six largest tech stocks now account for 8.6% of duration times spread risk among US high-grade corporate bonds, per Barclays.