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The cost of insuring against tech defaults struck record highs on Thursday, as investors rushed to hedge against the \u200brisk of credit stress building in the AI trade, with heavily indebted data centre operators like CoreWeave hit hardest.<\/strong><\/p>\n Hotter-than-expected US inflation \u200cdata, together with mounting expectations for higher interest rates, are adding to concerns about how quickly massive investment in artificial intelligence will translate into profits, as well as whether heavily indebted companies can generate returns fast enough to service mounting interest costs.<\/p>\n Credit default swaps (CDS) are sending a warning signal to markets.<\/p>\n The standouts \u200bwere five-year CDS spreads for CoreWeave, which blew past 1,100 bps, according to S&P Global Market Intelligence data , while the \u200byield on the company\u2019s 2031 bond rose to as much as 16% before retreating to around 14%.<\/p>\n Cloud \u2060computing giant Oracle, which has also stirred up investor angst because of its vast borrowing, saw its CDS near 300 bps, bringing \u200bthe rise this week to around 31 bps. CDS for Nvidia, Franco-Italian chipmaker STMicroelectronics and SpaceX, which offers some AI services, rose sharply.<\/p>\n CoreWeave, a \u200bloss-making \u201cneocloud\u201d company that owes nearly $50 billion, according to LSEG data, is in the eye of the storm.<\/p>\n \u201cCoreWeave is quickly becoming the AI trade\u2019s canary in the coal mine,\u201d said Kathleen Brooks, research director at XTB.<\/p>\n \u201cIts bonds have sold off sharply \u2026 this is a sign that investors might be going off the AI \u200binvestment narrative, which has included massive debt issuance to fund AI ambitions.\u201d<\/p>\n A surge in quarterly revenue from AI developer Anthropic did little to \u200bcalm the market\u2019s nerves.<\/p>\n According to an investor who attended a pre-IPO meeting with the company\u2019s leadership in San Francisco on Wednesday, third-quarter revenue rose 45% \u200cto $16.8 billion \u2060from the previous quarter. Anthropic is targeting a valuation of $2 trillion.<\/p>\n DEBT MARKET JITTERS<\/strong><\/p>\n CDS spreads show the number of basis points charged for default protection. The greater the perceived risk of a credit event, the wider the spread, meaning the 1,000 bps for CoreWeave CDS implies a risk of default in the coming five years of 64%, up from around 30% a year ago.<\/p>\n Earlier this week, Broadcom Chief Executive Hock \u200bTan compared the investor rush for \u200banything AI-related to \u201ccasino gambling.\u201d<\/p>\n CoreWeave stock \u2060was down another 2% on Thursday, following a 15% slide on Wednesday, meaning nearly a fifth of the company\u2019s value has burned up in two days.<\/p>\n CoreWeave shares have now fallen 10% since the start of this year, \u200bwhile those of rival Nebius, for which there are no publicly tradable CDS, are up about \u200b114%.<\/p>\n Credit default swap \u2060spreads for Amazon, Alphabet and Meta also traded at record highs, data from LSEG and S&P Global Market Intelligence showed, though they have risen far more slowly than Oracle, or CoreWeave.<\/p>\n \u201cThis is not the first time we\u2019ve had a sizeable market wobble on the back of AI fears, \u2060but as \u200bwe move to a capex cycle funded out of debt rather than simply \u200bfree cash flow, we have to increasingly respect the credit price action. AI financing costs aren\u2019t dramatic overall, but there are worrying themes at the edges,\u201d Deutsche Bank \u200bstrategist Jim Reid said.<\/p>\n<\/div>\n