By Lynn Strongin Dodds, DerivSource Senior Writer
Credit derivatives, especially credit default swaps, are expected to continue their upward trajectory due to geopolitical tensions, the AI boom and economic uncertainties.
Research from Fortune Business Insights show that the global CDS market is projected to grow from $8.9 trn in 2025 to $9.5 trn this year. Looking farther out, the market is estimated at $15.7 trn by 2034.
It is no surprise these instruments are in demand. They tend to come into their own during volatile periods as they offer default protection as well as a hedge against or bet on swings in bond prices. The drivers last year were ongoing conflicts in Ukraine and the Middle East as well as a barrage of vacillating tariff announcements from the Trump administration.
The same scenarios are expected to play out this year although analysts believe concerns over the AI bubble bursting will play a role. This trend started to emerge in Q4 last year with CDS volumes tied to a handful of US tech groups climbing 90% from September to December, according to data from clearinghouse DTCC.
The most notable example was tech giant Oracle Corp, which last December saw its five-year CDS reach a 16 year high after an earnings report showed the company’s debt burden had swelled to $100 bn to fund data centres and other equipment. The higher-than-expected spending cast doubt as to whether the firm would be able to generate profits from its AI investments.
In number terms, ICE Data Services showed the cost of protecting the company’s debt against default for five years rose to around 1.41 percentage point a year, the highest intraday level since April 2009.
Oracle became the credit market’s barometer for AI risk but it is far from the only big tech company borrowing money to finance ambitious AI spending, Goldman Sachs projects total hyperscalers’ capex from 2025 through 2027 will reach $1.15 trn, more than double the $477 bn spent from 2022 through 2024.
The difference is that is in a more precarious financial position than any of its peers with a lower credit rating and higher debt levels. While Alphabet and Meta both have AA credit ratings from S&P Global Ratings. Oracle has a BBB rating hovering at the lower end of investment grade. In addition, FactSet figures show that Oracle’s debt-to-equity ratio exceeds 462% compared to the under 50% of the other tech heavyweights.
Market participants are not leaving anything to chance. To meet the growing demand, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citi, Barclays, Deutsche Bank, and BNP Paribas have continued to bolster their CDS trading, clearing, and credit risk-management capabilities.
Buyside firms such as hedge funds and asset managers are also expanding their CDS offering to accommodate relative-value strategies, portfolio hedging, and credit-spread positioning, alongside improved market infrastructure such as central clearing, standardised contracts, and post-trade reporting systems.
