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.
https://twitter.com/junkbondinvest/status/2082108447294681255
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.
Companies want their CDS contracts to be cheap. When basis points are low, investors aren’t bidding extra for the right to receive a payout in the event of a credit default. Low basis points on CDS contracts — or even better, no CDS demand at all — indicate confidence that the company will service its debt on-time and in full.
...read more at protos.com
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Banks are afraid?
Should they be?
They are the sellers of the swaps so they want a higher premium ? No
Got to think of the incentives as the points rise who does it hurt the buyer or the seller?
It hurts the buyer but the seller pockets! That is why Michael Burry in the big short was looking like a fool. Banks were selling him CDS as “free money” since MBS never went bust until they did.
Rates can be going up because more people are betting against big tech being able to pay their debt.