Why are credit default swaps unnerving AI investors? – CNBC TV18

The cost of insuring against the risk of potential US tech defaults has hit record levels in the latest sign of credit stress building in the so-called AI trade, especially for data centres dependent on future revenue.

Although shares in companies driving the AI boom are still among the biggest gainers on global equity markets this year, many have fallen sharply in the past few weeks, as investors reassess the cost of capital against a backdrop of rising interest rates and inflation.

There are also doubts among some investors and analysts about when, and in some cases, if, the billions of dollars pouring into data centres, computer power and other infrastructure will pay off.

Demand for AI-linked credit default swaps (CDS), a form of insurance against default that gained prominence during the 2008 financial crisis, meanwhile has surged, even for heavyweights like Apple, Amazon and Microsoft.

For some of their more heavily indebted competitors, suppliers and customers the cost of CDS has risen even faster.

A derivative that provides protection against the risk that a bond issuer, whether a company or government, fails to meet its debt obligations.

Bond investors expect to receive interest payments and repayment of principal when…

Original source: https://www.cnbctv18.com/technology/