Zoom in: Lenders are quietly insuring against Big Tech credit risk as AI spending accelerates. According to Reuters, the catalyst is a wave of new debt issued to fund AI investments and related initiatives.[1]
By the numbers:
- Meta raised $30 billion in debt last month, Reuters reports.
- Oracle sold $18 billion in September.
- Alphabet also tapped markets recently.
Context: The use of credit default swaps (CDS)
The use of credit default swaps (CDS) is standard when investors want protection against a borrower’s potential default. However, the timing stands out given the AI capex cycle and the scale of recent issuance.
Context: AI Boom and Tech Debt Issuance
The AI race demands huge, upfront cash outlays. Consequently, even cash‑rich tech giants have leaned on bond markets to fund multi‑year build‑outs, according to available reports. That borrowing has nudged lenders to hedge concentrated exposures to a handful of names, Reuters notes.
Saba Capital’s Entry into Big Tech CDS Market
Saba Capital sold CDS protection to banks seeking to hedge exposures to major tech firms, Reuters reports. Notably, this was the first time Saba had sold hedging protection on some of these companies. It was also the first time banks asked Saba for this specific trade, according to a source cited by Reuters.
Moreover, the trades reflect a shift in hedging flows. Previously, many banks were comfortable warehousing tech credit exposure given strong balance sheets. But the size and speed of new AI‑linked issuance appears to have changed the calculus.
CDS Trades Reference Leading Tech Firms
The contracts reference Oracle, Microsoft, Meta, Amazon, and Alphabet, Reuters reports. Together, these names anchor AI infrastructure spending, from cloud capacity to data center buildouts. Therefore, demand for protection on these credits can serve as a proxy for risk appetite toward the AI cycle itself.
Rising Demand and Pricing for Tech Credit Hedges
Demand has driven up pricing for protection. Oracle and Alphabet CDS are trading at two‑year highs, per S&P Global data cited by Reuters. Contracts tied to Meta and Microsoft have also risen in recent weeks.
However, relative context matters. Despite recent widening, overall tech‑sector CDS levels remain below many other investment‑grade sectors, Reuters notes. Still, the move higher signals a meaningful shift in the perceived distribution of outcomes as AI capex ramps.
Furthermore, the bid for protection coincides with broader uncertainty about the pace of AI monetization. Near‑term revenues may lag infrastructure spend. Consequently, some lenders prefer to hold credit exposure but offset tail risks via CDS.
Broader Interest Beyond Banks
Demand is not limited to bank balance sheets. Large asset managers, including at least one private credit fund, were also interested in buying this protection, according to Reuters. Additionally, these investors often face mandates that limit outright shorting, so CDS can provide a cleaner, capital‑efficient hedge.
Diverging Views on Tech Credit Risk
Strategists are split. Bank of America’s Michael Hartnett recently called AI hyperscaler corporate bonds the “best short,” per Reuters. The call reflects concerns that AI investment outlays may exceed near‑term cash generation, pressuring spreads.
By contrast, others emphasize robust balance sheets and consistent cash flows at the largest platforms, Reuters notes. Citi and SocGen have pointed to relatively tight spreads and strong fundamentals as reasons to stay constructive. Yet even the constructive camp acknowledges that spreads have limited room to tighten if issuance remains heavy.
Therefore, positioning appears nuanced rather than binary. Some investors are maintaining core long exposure to the strongest issuers while using CDS to cap downside. Meanwhile, traders who doubt near‑term AI payoffs are leaning into protection as a directional view.
The upshot:
- Hedging demand is rising alongside AI‑linked borrowing.
- Pricing has moved, but tech credit still looks resilient versus other IG sectors.
- Views diverge, so liquidity in protection could stay elevated.
What’s next:
Monitoring issuance will be key. If AI infrastructure needs keep driving large bond deals, CDS demand may persist. Conversely, if monetization accelerates and leverage stabilizes, spreads could re‑tighten.
Additionally, watch bank hedging patterns into year‑end. Balance‑sheet managers often reassess limits before reporting periods. Consequently, they may add protection to manage concentration risk.
Finally, observe how private credit funds engage. If non‑bank demand for protection grows, liquidity in tech CDS could deepen. That, in turn, might lower hedging costs and normalize these trades as standard risk management, rather than a signal of stress.
By the numbers (recap):
- Saba sold CDS protection to banks for the first time on some Big Tech names, per Reuters.
- Oracle and Alphabet CDS are at two‑year highs.
- Meta and Microsoft CDS have also climbed.
- Tech CDS remains tighter than many IG sectors, despite the recent move wider.
Disclaimer: This article is for informational purposes only and does not constitute investment, legal, or tax advice. Markets and credit instruments such as CDS involve risk, and readers should conduct their own research or consult a professional before making any financial decisions.
