AI bubble fears are creating new derivatives

Concerns are mounting among debt investors regarding the heavy borrowing by major tech firms in their pursuit of advanced artificial intelligence (AI) capabilities. This apprehension has sparked a surge in the market for credit derivatives, which allow stakeholders to hedge against the risks associated with increased corporate debt. A year ago, credit derivatives linked to high-grade Big Tech firms were virtually non-existent, but they have now become some of the most actively traded contracts outside the financial sector. Recent trading activity has notably increased for companies like Meta Platforms and Alphabet, with outstanding contracts tied to approximately $895 million of Alphabet's debts and about $687 million for Meta. As estimates suggest that AI investments could exceed $3 trillion, primarily funded through debt, the demand for hedging is expected to rise. Notably, tech giants are evolving into some of the most indebted entities, raising alarms among investors. Although hyperscalers are currently managing to secure funding efficiently, with Alphabet recently completing a successful $32 billion debt sale, the exuberance surrounding these investments is prompting cautious sentiment in the market. With projections indicating that borrowing by these tech giants could reach $400 billion this year, investor anxiety is palpable as they navigate the balance between innovation and financial sustainability.