Debt risk rises, triggering a hedging wave! Nvidia (NVDA.US) CDS becomes one of the most active instruments in the US market

According to news from Zhitong Finance APP, after NVIDIA (NVDA.US) issued $25 billion in corporate bonds this June, derivatives related to the artificial intelligence (AI) chip giant have now become some of the most actively traded instruments in the U.S. credit default swap (CDS) market as investors seek to hedge debt exposure.

Nicholas Godec, Head of Fixed Income Tradable Products and Commodities at S&P Dow Jones Indices, cited DTCC data and stated that, over the past six months, market participants traded credit protection for $6.9 billion of debt, while the nominal trading volume in the previous six months was only $640 million.

The surge in trading volume is the main reason NVIDIA was included in the latest round of S&P’s CDX investment-grade index, which officially took effect this Monday. NVIDIA is one of the most liquid constituents in the 47th series of the index, which is used as an indicator assessing the market’s perception of credit risk. Other companies in the same series include tech giants Oracle (ORCL.US), Amazon (AMZN.US), Google (GOOGL.US), Broadcom (AVGO.US), Meta Platforms (META.US), and Microsoft (MSFT.US).

Nicholas Godec stated: “There has been enormous growth in CDS trading volumes related to these companies. And as financing activity continues in sectors such as data centers, there are no signs this trend will stop in the short term.” This week, six other companies besides NVIDIA joined the index, including SpaceX (SPCX.US); both companies issued $25 billion in investment-grade bonds this June.

Driven by the AI boom, debt risk for NVIDIA and SpaceX has risen

Every March and September, S&P Dow Jones Indices rebalances the CDX index and reviews multiple factors, including CDS liquidity, credit ratings, and the issuer’s debt structure. The inclusion of new constituents resets the index’s maturity and typically increases trading volume. This index adjustment, combined with rising U.S. Treasury yields, resulted in a wider spread for the index.

Demand for credit default swaps comes from investors seeking to hedge potential losses from the ever-increasing debt of hyperscale cloud service providers. Meanwhile, Wall Street banks are also buying credit protection to reduce their own risk exposure to these borrowers, which allows the banks to further expand business dealings with them.

So far this year, after substantial new borrowing and a series of AI-related infrastructure deals announced by NVIDIA, the cost of providing default protection for NVIDIA’s debt has doubled, causing investors to worry about its overall debt burden.

Barclays macro credit strategist Jigar Patel stated: “For anyone wanting to hedge AI-specific risks, trading volumes for single-name AI-related CDS contracts have been astonishing. I think this makes them a better alternative for hedging.”

S&P Dow Jones Indices rebalances its swaps index for the U.S. high-yield market twice a year, with the next adjustment expected to take place on Monday.