Investors ramp up AI-related credit default swap trades to hedge industry debt risks.

October 20 — Investors are rushing to buy credit default swaps (CDS) to hedge their portfolios against the bursting of the AI boom. This financial instrument, which rose to fame during the global financial crisis, is now seeing a sharp surge in trading volume. To fund trillions of dollars in AI infrastructure spending, companies have embarked on a borrowing spree, driving up demand for these "insurance-style" derivatives that pay out if the referenced company defaults on its debt.

According to Morgan Stanley research data, in September, CDS linked to bonds issued by Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom, and Nvidia traded an average of more than $9 billion per week, compared with less than $2 billion in July. Institutional data shows that year-to-date, trading volume in the U.S. corporate CDS index has already surpassed the total for all of last year. (Financial Times)