The tech companies Alphabet, Apple, and Microsoft are some of the most profitable companies in the world. Their annual profits are north of $100 billion. They are cash-rich, but even that cash is proving insufficient given the kinds of investments being made in AI. The current spending on scaling AI data centres is absorbing Trillions of dollars.
Global data center spending is expected to hit $1 trillion in 2026 and more than double to $2.1 trillion by 2028, BofA Global Research estimated in a note on Friday, driven by growing demand for and development of AI services.
Source: Reuters
This is a lot of money even by the standards of these tech behemoths. This is forcing them to take on a lot of debt on their books through bond issuance. Since they are extremely profitable entities, their bond issues are also being heavily subscribed. The AI debt issuance has been taking in so much money that sovereign debt has come under fire. The US Treasury bond, which is considered the safest debt, is required to pay 5.3% interest on the 30-year bond.
In other words, the US government is being treated worse than a random homebuyer in the US would have been 5 years ago.
It is estimated that in 2026, tech companies would have issued $850 billion in debt, and this number is only expected to go up in 2027.
But,
Investors are increasing their use of credit default swaps (CDS) to hedge exposure to debt issued by companies involved in artificial intelligence infrastructure, according to market data and financial industry research.
The increase comes as technology companies raise substantial amounts of capital to finance data centres, semiconductors and other computing infrastructure.
Morgan Stanley Research reported that weekly trading in CDS linked to bonds issued by Oracle (NYSE:ORCL), SpaceX (NASDAQ:SPCX), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Meta (NASDAQ:META), Broadcom (NASDAQ:AVGO) and Nvidia (NASDAQ:NVDA) averaged more than $9 billion in September.
That compares with less than $2 billion per week in July.
Separately, Bloomberg data showed that trading volumes in US corporate CDS indices have already exceeded the total recorded throughout 2025.
Source: Yahoo! Finance
Now, if you have heard of the Credit Default Swap, it is the instrument, along with the Collateralised Debt Obligation (CDO), that gave us the 2008 financial crisis.
Credit Default Swaps is the name suggests is an instrument that comes into play if someone defaults on their credit. Think of it as insurance against a default.
The fact that the number of contracts for CDS are going up shows that many of these investors are worried, and they think that there is a likelihood of many of these companies defaulting.
In 2008, the housing debt packaged into collateralised debt obligations (CDOs) was sold to investors. The assumption was that the housing market could not collapse and that it was backed by an asset with value. Investors invested heavily in CDOs because they were able to buy credit default swaps, which were being freely sold. When repayment failed, there was increasing pressure to honour the credit default swaps. The contagion was so wide that almost the entire banking sector froze. They had to be bailed out by the taxpayers.
We are confronted with a similar situation.
Companies are making investments in AI, assuming that the sector will grow by orders of magnitude. The revenue that companies like Anthropic and OpenAI need to generate to justify this kind of investment will be in the region of several hundreds of billions of dollars. This is a huge ask and would require entire industries to move to AI in an extremely short period of time.
As they prepare to go public, their financials are becoming transparent, and their growth rates are becoming apparent. Investors are beginning to wonder what profitability would mean for these companies.
The fact that they are choosing to buy Credit Default Swaps shows that they are nervous about the narrative.
If the underlying asset, the AI companies, fail to post healthy growth in any quarter, it can set off a cascade of events in the financial markets. It is beginning to feel like 2008 all over again!