CDS Prices Rise for AI Borrowers Even as Stocks Hit Records

Credit default swap prices for AI-linked borrowers rose this week even as U.S. equities set record highs on fresh evidence of economic strength, a divergence that a financial column published this week treats as an early warning. The contracts, which pay out when a borrower defaults, moved higher for Meta and Alphabet's Google, according to the column. Microsoft shows the same pattern. Oracle saw the most marked jump. SpaceX CDS prices also surged after reports of a US$40 billion funding call.

The column recalls that two decades ago, rising CDS prices for mortgage bonds and banks offered an early warning while equity markets were cheerful. The same pattern, it argues, is visible now in a different group of borrowers.

Not everyone reads the pricing that way. Some observers think the CDS signal is distorted because that market is thinly traded, the column notes. Bulls argue the equity rally is justified because U.S. corporate earnings are expected to have risen 27% in the third quarter. The column does not pick a side. It proposes five questions for investors, two of which concern the credibility of technology forecasts and the mechanics of funding the AI build-out.

On forecasts, Apollo's Torsten Sløk said in the column that analysts currently expect "the sector's operating cash flow to double to roughly US$2.4 trillion by 2028" on surging AI product demand. Analysts also project muted cash flows for non-tech companies. The gap, Sløk said, "raises the question of who exactly will be writing all those cheques to buy AI services." If the technology projections are the ones that are over-optimistic, the column concludes, the market is in a bubble that will eventually pop. If tech customers are the gloomy ones, the column says, the projections may be closer to accurate.

The funding question is the second. Technology companies initially paid for the AI build-out out of internal resources, according to the column. Those resources are now exhausted, and the companies are borrowing heavily to cover projected capital expenditure. "The quantum of debt that is hitting the marketplace is historic," Greg Peters, a top official at PGIM, recently told the Financial Times. The column says that debt demand is already pulling funding from other sectors. It quotes one top American financier who suggested America needs "a Fannie Mae style entity to fund the AI build-out," a vehicle to repackage technology debt the way Fannie Mae repackages mortgages. The column calls that outcome unlikely. The suggestion, it says, is a measure of how large the financing gap has become.

"It is not just French bonds that are signalling unease," the column says.