AI Bubble Fears Are Creating New Derivatives
View original at finance.yahoo.comAI Bubble Fears Are Creating New Derivatives Photographer: Kyle Grillot/Bloomberg (Bloomberg) -- Debt investors are worried that the biggest tech companies will keep borrowing until it hurts in the battle to develop the most powerful artificial intelligence…
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Appetite for newer basket hedges can be expected to grow, and more active trading of private credit will create additional demand for targeted hedges
80% confidenceThe software and technology sectors pose one of the all-time great concentration risks to the speculative-grade credit market
80% confidenceCapital expenditures will reach as much as $185 billion in 2026 to finance AI build-out
80% confidenceIn a tail risk scenario, big companies with strong balance sheets and trillion dollar market caps will outperform the general credit backdrop, which is why hedge funds are willing to sell protection
80% confidenceHyperscaler investments are so ginormous that it begs the question of whether investors want to be nakedly exposed, and credit derivatives indexes offering broad default protection aren't enough
80% confidenceCredit markets haven't fully priced in AI disruption risk, and any trouble in corporate debt could make it harder for firms to raise money
80% confidenceThe sheer amount of potential debt suggests that hyperscaler companies' credit risk profiles could come under some pressure
80% confidenceHyperscaler borrowing will reach $400 billion in 2026, up from $165 billion in 2025
80% confidenceExpected distribution periods of three months for loans on data center and AI projects could grow to nine to 12 months, leading banks to hedge distribution risk in the CDS market
80% confidence