Why credit default swaps are spooking AI investors

The cost of insuring against potential US tech defaults has hit record levels, signaling growing credit stress in the AI trade, particularly for data centres reliant on future revenue. Shares in AI-driven companies have fallen sharply in recent weeks as investors reassess capital costs amid rising interest rates and inflation. Demand for AI-linked credit default swaps (CDS), insurance against default, has surged even for heavyweights like Apple, Amazon and Microsoft, while costs for more indebted competitors have risen faster. Doubts persist among investors about when billions poured into data centres and infrastructure will pay off. CDS spreads for CoreWeave, a heavily indebted data centre operator, have exceeded 1,000 basis points, implying a roughly 63% default chance over five years, up from 30% a year ago. Oracle trades near 300 bps, while Nvidia and Meta are around 90-104 bps, versus an investment-grade index near 60 bps.