Why are investors buying insurance against the AI boom?

Investors looking for signs that the artificial intelligence boom has gone too far may want to look beyond what’s happening to share prices of technology stocks and peer into the world of credit default swaps.

Trading in CDSs has ballooned with bonds linked to Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom and Nvidia exceeding $9 billion in September, up from less than $2 billion in July, according to Morgan Stanley.

What are credit default swaps?

Credit default swaps (CDS) are financial contracts which resemble insurance on a borrower’s debt. The protection buyer (a bond holder) pays a regular premium to the seller.

In the event of a company getting into financial trouble and unable to service or pay back its debt, the seller of a CDS compensates the buyer.

The annual premium is usually expressed in basis points where one hundred basis points equals one percentage point. To illustrate, a five-year CDS spread of 100 basis points means paying £100,000 a year to protect £10 million of debt.

A rising spread means protection has become more expensive. It usually indicates that investors perceive greater credit risk, although it is not an explicit forecast.

Why have CDS volumes risen?

While higher trading volumes can reflect growing credit concerns, they could also result from greater bond issuance, or more investors using CDS to protect their bond investments.

For context, AI-linked companies have raised an estimated $466 billion of debt in 2026, according to Morgan Stanley research, compared with just $101 billion in 2025.

This is being used to finance data centres, chips and computing infrastructure.

Investors are looking for protection

The increasing concentration of global indices due to the strong outperformance of large technology companies is making it harder for fund managers to stay broadly diversified.

Multi-asset managers and equity investors can use CDS as a comparatively inexpensive way to hedge portfolio exposures to the AI trade. More directly, bond fund managers can use CDS to protect portfolios holding technology debt.

An interconnected web

The AI supply chain has become very interconnected with AI developers, cloud providers, chipmakers and data centre operators all depending on each other through supply contracts, financing arrangements and infrastructure commitments.

This means that concerns about the weakest borrowers in the chain can quickly spread across the ecosystem to larger companies.

What are CDS spreads saying?

It is worth pointing out that investors have been discerning about which companies they perceive as riskier.

While Meta’s and Nvidia’s five-year CDS spreads recently reached record levels of around 100 basis points, they pale into insignificance compared with Oracle’s 322 basis points and neo-cloud provider Coreweave whose CDS stood at 1,090 basis points.

Investors appear to be particularly concerned about those businesses combining heavy AI spending with greater leverage and which have less available cash flow to service debts.

Oracle has issued $118 billion in long-term debt and has another $39 billion in lease obligations according to FactSet data. Analysts estimate free cash flow will be negative to the tune of $23.7 billion in 2026 and $36 billion in 2027.

The main message is that the costs and financing of AI can no longer be ignored. Investors are increasingly demanding a higher price to compensate for the risk that vast AI investments take longer to pay off.

What does this mean for investors?

Rising CDS activity does not mean the AI boom is about to collapse, but it does show investors are becoming more discerning about which companies to back.

Bond markets are starting to separate cash-rich technology leaders from those relying on borrowed money to fund the AI race. The companies best placed will not necessarily be those spending the most, but those that can turn investment into sustainable free cash flows.