HEDGING DEMAND INCREASES AGAINST AI DEBT

 Lenders and investors are looking to protect themselves against potential defaults by tech companies, known as hyperscalers, as they borrow hundreds of billions of dollars to invest in artificial intelligence. Demand for credit protection has increased, with the cost of credit derivatives on Oracle Corp.'s bonds more than doubling since September, and trading volume for credit default swaps tied to the company jumping to about $4.2 billion. Banks and money managers are trading more derivatives that offer payouts if individual tech companies default on their debt, with some of the biggest buyers of single-name credit default swaps being banks that have seen their exposure to tech companies surge in recent months.

Hyperscalers are highly rated, but they’ve really grown as borrowers and people have more exposure, so there are more dialogues happening on hedging. Trading activity is still small compared with the amount of debt that is expected to flood the market. But the growing demand for hedging is a sign of how tech companies are coming to dominate capital markets as they look to reshape the world economy with artificial intelligence. 

Most of this year’s $220 billion of gross AIrelated issuance has translated into new net supply to the market. On our estimates, AI-related net supply has accounted for 33% of overall USD net supply year to date. We think this trend can be sustained as part of a re-leveraging impulse which should boost net supply in USD markets in 2026.

On a stock basis also, the amount of debt tied to artificial intelligence has ballooned to $1.2 trillion, making it the largest segment in the investment-grade market. AI companies now make up 14% of the high-grade market from 11.5% in 2020, surpassing US banks which are at 11.7% of outstanding IG market.

On a company level basis, Oracle CDS (Credit Default Swaps) remains in most demand. It seems that Oracle CDS is the credit market benchmark for AI risk. Traders have piled into the company’s credit-default swaps in recent months as Oracle’s massive AI-related spending spree, its central role in a web of interrelated deals, and its weaker credit grades compared with players such as Microsoft Corp. or Alphabet Inc. have made the contracts the market’s preferred way to hedge and bet against the AI boom.  Also, Oracle’s net adjusted debt is expected to more than double to roughly $290 billion by fiscal year 2028 from around $100 billion currently where as its trailing operating cash flow as of May’25 was 21 BN USD only for one year. During the same period, the company's capital expenditures were roughly 27 BN USD significantly exceeding its operating cash flow. The difference between operating cash flow and capital expenditures resulted in a negative free cash flow of about 6 BN USD for the company.

The price to protect against the company defaulting on its debt for five years tripled in recent months to as high as 1.11 percentage point a year today, or around $111,000 for every $10 million of principal protected, according to ICE Data Services. As AI skeptics rushed in, trading volume on the company’s CDS ballooned to about $5 billion over the seven weeks ended Nov. 14. That’s up from a little more than $200 million in the same period last year. 

Summary: As AI debt financing increases further next year, demand for hedging against AI debt will significantly increase. And companies such as Oracle CDS will be closely watched for risks tied to AI sector performance. When big corporate bond issuers grow debt balances quickly and become a larger weighting in the IG (investment grade) index, it can lead to large volumes in their CDS as seen in current trends.

(You can follow us on twitter https://x.com/MacroSpectrum or visit our website https://macro-spectrum.com/ for unbiased in depth research on global markets in real time)

Legal Disclaimer:

Trading foreign exchange/commodities/equities/bonds on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange/commodities/equities you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange/commodities/equities trading and seek advice from an independent financial advisor if you have any doubts.

Opinions expressed at Macro Spectrum are those of the individual authors and do not necessarily represent the opinion of Macro Spectrum or its management. Macro Spectrum has not verified the accuracy or basis-in-fact of any claim or statement made by any independent author: errors and omissions may occur. Any opinions, news, research, analyses, prices or other information contained on this website, by Macro Spectrum, its employees, clients or contributors, is provided as general market commentary and does not constitute investment advice. Macro Spectrum will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Our content contributors do not offer financial advice or personal recommendations but rather their real-time market view and comments on potential upcoming scenarios. Their insights should be used as a complement to your own research.

The website provides generic information to its subscribers and it is strongly advised that the client(s) should consult with a Financial Advisor before proceeding to copy the Company's trades.

While all information posted is believed to come from reliable sources, the Company does not guarantee the accuracy, correctness, or completeness of information available from its service and therefore will not be liable for any loss incurred.

Research reports/ opinions/ pod casts/news articles/forum discussion shared on Macro Spectrum website do not provide investment advice, nor provide any personalized investment recommendations and/or advice in making a decision to trade.

No guarantee is made that any user of this service will or is likely to achieve results advised by the research reports/ opinions/ pod casts/news articles/forum discussion. There is often a large difference between theoretical performance and the actual results later reached by any trading platform. There are many influencing factors related to either the market, in general, or to the specific implementation of any signals which can affect actual trading buy/sell results.

Before you start trading, please make sure you have considered your entire financial situation, including financial commitments and you, understand that trading is highly speculative and that you could sustain significant losses.

Macro Spectrum & it’s employees & management will not be liable for the acts, omissions or with regards to delay or non-delivery of any means of notifications in regards to signals alerts or calendar event alerts. It should not be presumed that the methods, techniques, or indicators presented on Macro Spectrum will result in profits or that they will not result in losses. The advice given on the service are for informative purposes only. These setups are not of any order to buy or sell. Macro Spectrum takes no responsibility for your trading activity and results. Past results are not necessarily indicative of future results.