Investor hedging against the risk of U.S. hyperscalers’ defaulting on their mushrooming debt is surging, reflecting deepening concern over how the AI buildout is being funded. But the chances of a “credit event” are still remote.
The explosion in many of these AI giants’ credit default swap (CDS) spreads makes for striking charts and juicy headlines. They have borrowed too much, free cash flows are evaporating, and a financial reckoning of some sort is looming. And given how much spending, economic growth and stock market gains these multi-trillion-dollar behemoths have generated in recent years, failure to meet their mounting debt obligations would be potentially catastrophic.
These are the worst-case scenarios some observers say CDS markets are flagging. But while it’s true many of these companies’ balance sheets and future income prospects are looking shakier than they were only a few quarters ago, a sense of perspective is required.
First, CDS markets are incredibly thin. These derivatives provide protection against the risk that a bond issuer fails to meet its debt obligations, effectively acting as insurance that pays out if it misses interest or principal payments. But trading volumes are tiny and markets illiquid. According to Depository Trust & Clearing Corporation (DTCC) figures, the combined average daily notional volume of CDS contracts on 16 tech firms that were traded or cleared in the second quarter was US$637.5 million. That’s barely 4% of the total US$16 billion average daily notional volume across all corporate and sovereign CDS contracts. The average number of trades per day in tech CDS was 54, with exactly one-third of that in Oracle. Fourteen of the remaining names saw single-digit average daily trades, most of them fewer than five, while Apple CDS didn’t trade at all, DTCC data showed.
Granted, these numbers are significantly higher than six months prior. Average daily notional volume in the fourth quarter of last year was just US$105,000, and the average number of trades per day was eight. Some tech titans, including Alphabet , Meta Platforms and Nvidia, had no outstanding CDS at all.
This is partly why CDS spreads are widening now. Hyperscalers and others are borrowing heavily to fund the AI buildout, so there’s much more debt to hedge — and speculate — against. These spreads aren’t necessarily widening because investors believe these companies will default, but because CDS is a relatively straightforward and cheap vehicle to hedge against their increasing exposure to the AI sector.
Amazon, Alphabet, Meta Platforms and Oracle issued around US$195 billion in bonds in the first half of this year, up about 80% from roughly US$108 billion in all of 2025, according to a Reuters analysis of LSEG data.
Bond issuance by five hyperscalers, including Microsoft , is expected to rise to US$250 billion this year and US$400 billion in 2027, according to Goldman Sachs estimates. Compare that with combined bond issuance of US$16.7 billion in 2024 and US$13.7 billion in 2023, and it’s little wonder CDS activity is taking off, in relative terms.
Hyperscalers’ free cash flow has collapsed and is about to turn negative. According to Societe Generale estimates, it won’t turn positive again for at least two years but won’t look back after that, soaring way beyond the peaks of a few years ago.
That remains to be seen. These firms are cash-generating machines, but some may struggle with rising debt loads more than others. S&P Global Ratings last month cut Oracle’s credit rating to BBB-, one notch above junk. Oracle’s debt load stands at around $130 billion, and its CDS spread has widened to more than 200 basis points. A year ago, it was 40 bps.
But are CDS spreads particularly reliable predictors of default?
Strategists at SocGen calculate the cumulative probability of default implied by five-year CDS spreads for U.S. hyperscalers is around 7%, a sharp increase since last year and now higher than the broader U.S. investment-grade average of around 4.5%. But that is “materially” inflated by Oracle’s implied default probability of more than 16%, they add, noting that these companies have never defaulted on their debt obligations before.
Big Tech is taking on more debt to help fund the biggest capex boom in history. But major credit events still seem small dots on the horizon.