Investors are increasingly seeking protection against the potential collapse of AI debt, mirroring the behavior of traders during the 2008 financial crisis. The surge in borrowing to finance the AI boom has raised concerns about the risk of a bust. While investors haven't yet abandoned their AI investments, they are actively exploring protective measures. Credit default swaps (CDS), once central to the 2008 crisis, are now making a comeback, particularly for companies like Oracle, Meta, and Alphabet. This resurgence in CDS trading reflects the rising costs of safeguarding against the possibility of an AI bust. The market's dormant state earlier this year has now seen a significant increase in trading volume, with weekly CDS trading reaching over $8 billion for these AI-related companies. The concern revolves around the massive borrowing by AI companies, with the fear that they might not need the infrastructure they're building, potentially leading to a bust. Oracle's CDS trading has more than doubled this year, with a notable surge after the company announced significant borrowing. However, the companies themselves have not directly addressed the CDS activity, indicating awareness of the borrowing concerns. Investors are hedging their exposure to the AI boom, protecting against potential bond price fluctuations rather than expecting defaults. The illiquidity of CDS in the past has made it an affordable way to buy protection, cheaper than shorting stocks. Despite the concerns, Wall Street hasn't sounded the alarm bells yet, as investors are still holding onto their AI investments while seeking protection. The situation highlights the ongoing tension between the AI boom and the potential bust, with investors taking proactive steps to safeguard their portfolios.
