The cost of insuring against tech defaults hit record highs on Thursday as investors rushed to hedge against credit stress building in the artificial intelligence trade. Heavily indebted data centre operators, with CoreWeave hit hardest, drove the move.
Hotter-than-expected US inflation data and growing expectations of higher interest rates have added to doubts about how quickly heavy spending on AI will turn into profits. Investors are also questioning whether indebted companies can earn enough returns to keep up with rising interest costs.
CoreWeave sits at the centre of the sell-off
The sharpest moves were in five-year credit default swap (CDS) spreads for CoreWeave, which rose past 1,100 basis points, according to S&P Global Market Intelligence data. The yield on the company’s 2031 bond climbed to as much as 16% before easing back to around 14%.
LSEG data show that CoreWeave, which is loss-making and is described as a “neocloud” company, owes nearly $50 billion. Its stock fell a further 2% on Thursday after a 15% slide on Wednesday, meaning close to a fifth of its value was wiped out in two days. The shares are still down about 10% since the start of the year, while rival Nebius, which has no publicly tradable CDS, is up roughly 114%.
Kathleen Brooks, research director at XTB, said: “CoreWeave is quickly becoming the AI trade’s canary in the coal mine.” She added that the bond selloff was a sign investors might be turning away from the AI investment story, which has relied on heavy debt issuance.
Oracle, Nvidia and other names see wider spreads
Cloud computing giant Oracle, which has also unsettled investors with its large borrowing, saw its CDS near 300 basis points. That brought its rise for the week to around 31 basis points. CDS on Nvidia, Franco-Italian chipmaker STMicroelectronics and SpaceX, which offers some AI services, also climbed sharply.
Credit default swap spreads for Amazon, Alphabet and Meta also traded at record highs, though they have risen far more slowly than those of Oracle or CoreWeave. Meanwhile, a surge in quarterly revenue at AI developer Anthropic did little to ease market nerves. An investor who attended a pre-IPO meeting with the company’s leadership in San Francisco on Wednesday said third-quarter revenue rose 45% from the previous quarter to $16.8 billion. Anthropic is targeting a valuation of $2 trillion.
What the spread signals for markets
CDS spreads show the number of basis points charged for default protection, and wider spreads signal a greater perceived risk of a credit event. The 1,000 basis point level for CoreWeave CDS implies a 64% risk of default over the coming five years, up from around 30% a year ago.
Earlier this week, Broadcom Chief Executive Hock Tan compared the investor rush into anything AI-related to “casino gambling.” Jim Reid, a strategist at Deutsche Bank, said markets had seen sizeable AI-related wobbles before. He argued, however, that as the investment cycle is increasingly funded by debt rather than free cash flow, credit price action must be taken more seriously. Reid said AI financing costs were not dramatic overall but that there were worrying signs at the edges.
