Tech Giants Ramp Up Bond Issuance, CDS Spreads Surge! Investors Fear AI Bubble, But It Might Be a Misunderstanding

Investment in AI data centers and infrastructure is accelerating rapidly. Recently, tech giants such as Amazon, Alphabet, Meta, and Oracle have been issuing large volumes of corporate bonds. This raises a growing concern in the market: If capital expenditures related to AI fail to generate sufficient cash flow, could the ballooning debt of these companies become the next source of financial risk?

Looking at movements in the Credit Default Swap (CDS) market, investors are indeed increasing their hedging against the credit risk of major tech firms. The CDS spreads of some large tech companies have noticeably widened recently, and related charts have become talking points in discussions about an AI bubble and corporate debt risk. However, interpreting this solely as "tech giants are about to default" would be premature.

According to Jamie McGeever, a columnist at Reuters, the widening of CDS spreads does not necessarily mean the market believes a company is about to collapse. It could simply reflect the fact that these companies are issuing more bonds, so investors need more tools to hedge their growing credit exposure. More importantly, the size of the CDS market for tech companies remains small and illiquid, making price fluctuations easier to amplify.

### The Tech CDS Market Is Still Small

Data from the Depository Trust & Clearing Corporation (DTCC) shows that in Q2 2025, the average daily notional principal amount traded across CDS contracts for 16 tech companies with trading or settlement records totaled approximately $637.5 million. This represents only about 4% of the average daily trading volume of around $16 billion for all corporate and sovereign CDS.

Transaction counts are also limited. On average, there were only 54 daily trades for tech company CDS in Q2, with Oracle accounting for roughly one-third. Among the remaining 14 companies, most averaged fewer than five trades per day, and 14 had single-digit average daily trading volumes. DTCC data even showed that Apple’s CDS had no transactions during this period.

However, compared to six months ago, the tech CDS market has indeed warmed up. In Q4 2024, the average daily notional trading volume for tech company CDS was just $105,000, with only eight average daily trades. Some tech giants, including Alphabet, Meta, and Nvidia, had no outstanding CDS contracts at that time.

### Why Have CDS Spreads Suddenly Widened?

To build data centers, purchase AI servers, and expand computing capacity, hyperscalers and other tech giants are aggressively issuing bonds. As corporate debt increases, investors holding these bonds naturally seek more credit hedging tools, leading to greater activity in the CDS market.

In other words, a rise in CDS spreads does not necessarily mean the market believes "this company is about to default." It may simply reflect the market buying insurance against the growing credit exposure associated with AI-related investments.

Reuters’ analysis of LSEG data found that Amazon, Alphabet, Meta, and Oracle collectively issued about $195 billion in bonds in the first half of 2025—about 80% more than the full-year total of approximately $108 billion in 2025.

Goldman Sachs estimates that the five largest hyperscalers, including Microsoft, could issue up to $250 billion in bonds in 2025, potentially rising to $400 billion by 2027.

By comparison, the combined bond issuance of these five companies was only $16.7 billion in 2024 and just $13.7 billion in 2023. With such rapid growth in debt supply, the increase in CDS hedging demand is unsurprising.

### Free Cash Flow Is the Real Issue to Watch

More importantly, attention should be paid to the pressure that the AI capex boom is placing on tech giants’ free cash flow.

Currently, hyperscalers are making record-breaking capital expenditures. Massive investments in data centers, chips, and power infrastructure are eroding what were once strong corporate free cash flows.

Société Générale estimates that free cash flow among hyperscalers has declined sharply and may even have turned negative, with a return to positive territory unlikely for at least another two years.

That said, this does not mean these companies’ financial conditions are already out of control. After all, these firms remain among the world’s most powerful cash-generating machines. The real question is: As AI investments continue to expand and debt rises simultaneously, which companies can withstand higher leverage, and which might feel pressure first?

Oracle is currently the most watched case. S&P Global Ratings downgraded its credit rating last month to BBB-, just one notch above junk-grade bonds. Oracle now carries about $130 billion in debt, and its CDS spread has widened to over 200 basis points—far exceeding the approximately 40 basis points from a year ago—indicating a rapid shift in how the market prices Oracle’s credit risk.

### Can CDS Really Predict Tech Giant Defaults?

The key question is: How much of the widening CDS spreads actually reflects true default risk?

Société Générale strategists calculated, based on 5-year CDS spreads, that U.S. hyperscalers currently have an implied cumulative default probability of about 7%. This is notably higher than last year and exceeds the overall average of about 4.5% for U.S. investment-grade corporations.

However, Société Générale also noted that this 7% figure is heavily influenced by Oracle. When viewed alone, Oracle’s implied default probability exceeds 16%, thus pulling up the average for the entire group of hyperscalers.

More importantly, these tech giants have never defaulted on debt in the past. Therefore, the message from the CDS market is closer to “investors are paying higher hedging costs for larger credit exposure” rather than “the market is certain that tech giants are about to default.”

### The Biggest Risk of AI May Not Be Default

For the past few years, AI investment has largely been funded by the strong cash flows of tech giants. Now, as the scale of data center and AI infrastructure investment reaches record highs, debt financing is becoming increasingly important.

When companies simultaneously experience “exploding capex, declining free cash flow, and rising debt,” the market naturally begins to reassess their credit risk—but this is still far from a genuine credit crisis.

The current widening of CDS spreads does serve as a reminder that the AI investment frenzy is pushing tech giants’ balance sheets into a new phase. However, because the tech CDS market itself is small and sparsely traded, price signals can be easily amplified. One cannot conclude that a wave of defaults among AI giants is imminent based solely on rising CDS spreads. What truly needs watching is whether massive AI capital expenditures can ultimately be converted into sufficient revenue and cash flow.

If AI-driven revenue growth keeps pace with capex and debt expansion, today’s seemingly deteriorating credit metrics might simply be a byproduct of entering a new investment cycle.

Conversely, if AI investment returns fall short of expectations and companies must continue borrowing to fund capex, then the abnormal volatility seen today in the CDS market could become a harbinger of larger credit risks.