Credit default swaps forecast AI bankruptcies

Credit default swap (CDS) demand is surging throughout the AI industry. Five years of default protection on $10 million of Nvidia debt now costs about $82,000 a year — double since the start of July when it cost roughly $40,000.

CDS spreads are deteriorating rapidly across mega-cap AI stocks including Alphabet, Amazon, Meta, Broadcom, and SpaceX, which all hit record spreads this week.

Alphabet CDS contracts traded up to 67 basis points days after reporting its first negative quarterly free cash flow since its 2004 listing.

Investors refer to the “price” of a CDS by its basis point spread above the notional amount of debt it guarantees.

A basis point is one hundredth of a percentage point, and the higher they “spread” above the notional quantity of debt, the more investors have to pay as a de facto insurance premium.

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