How to monitor tech debt that could fuel an AI bubble
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Bond yields for the largest Big Tech debt borrowers have climbed and trading in credit default swaps has surged as investors reassess the risks behind the AI boom.
Why it matters: The activity may actually reflect traders hedging so they can buy even more AI-linked debt, a sign of froth, not fear.
What they're saying: "People haven't become nervous. The current signal is they are hedging exposure so they can buy more," Paul Kedrosky, a venture capitalist, tells Axios.
- Investors who want to hold Big Tech bonds — especially those of firms issuing debt to fund data-center expansion — often hedge by purchasing credit default swaps, he notes.
- "It's inevitable that as more debt is issued, there's more activity in CDS. People think it's because (investors) are worried about the solvency of Oracle. It's actually the opposite. It's a way of allowing them to buy more debt. That's actually a sign that people haven't become nervous."
Catch up quick: While credit default swaps — derivatives on the possibility of a default in the underlying debt — can be used to express speculative or bearish views, they are also a tool for banks, insurers and asset managers to neutralize risk and reduce regulatory capital charges.
- It means that rising CDS volumes do not automatically signal mounting default concerns. They may simply reflect more debt being bought — and hedged — as investors lean further into AI infrastructure exposure.
By the numbers: Trading volumes of credit default swaps surged by 90% since early September, per data from MooMoo, an AI-powered investing platform.
- The latest debt issuance from Oracle was five times oversubscribed.
- Following its recent earnings results, Oracle credit spreads widened by about 30 basis points on average across the curve, and its five-year CDS reached peaks not seen in almost 20 years, according to JPMorgan.
- "We expect persistent new issue risk — not only from Oracle but also from higher-quality AI issuers more broadly — along with AI bubble concerns, to weigh on spreads in 2026," JPMorgan Chase credit analyst Erica Spear writes in a note.
Between the lines: The surge in CDS trading could mean investors are not actually preparing for the AI bubble to burst. Instead, they are preparing to double down, but want to hedge their bets just in case.
What to watch: Wider spreads on credit default swaps. The real stress signal comes when CDS spreads break out well beyond current levels, according to Kedrosky, which he feels are explained by simple hedging flows.
- That would indicate investors are not just neutralizing risks but actively pricing in growing odds of default. If trading patterns move from buyers hedging their own holdings to speculators shorting credit outright, that would mark a turn from froth to fear.
