Oracle’s CDS Spike Raises AI Debt Concerns: What Investors Need to Know

The cost of protecting Oracle’s debt from potential default has surged, raising fresh concerns about how much large companies are borrowing to fuel the AI boom. After Oracle’s recent earnings report, investors began questioning whether the corporate world is overspending on AI and whether an “AI bubble” might be forming.

With more than $100 billion in outstanding debt, Oracle has quietly become a key indicator of market sentiment toward AI-related spending. While its stock price remains strong, activity in the credit default swap (CDS) market is signaling growing caution.

Why Oracle’s CDS Are Getting Attention

Trading in Oracle credit default swaps has skyrocketed over the past year. These contracts are now close to their highest levels on record, painting a far less optimistic picture than the company’s stock performance.

The spike reflects rising investor concern about two major issues:

• Oracle’s rapidly growing debt load

• Heavy investment across the tech sector to support AI growth

This combination has made Oracle a proxy for broader credit risk linked to the AI boom.

What Exactly Is a Credit Default Swap?

A credit default swap (CDS) is a financial contract that acts like insurance for bondholders. When investors buy bonds, they expect regular interest payments and repayment at maturity — but there’s always a chance the borrower fails to pay.

A CDS helps protect against that risk.
Here’s how it works:

• The buyer pays a periodic premium (like an insurance fee)

• The seller agrees to compensate the buyer if the issuer defaults or misses payments

• The cost of the CDS — known as the credit spread — reflects how risky the issuer is perceived to be

For example, a CDS traded at 100 basis points (bps) means the buyer pays $1 for every $100 of debt insured.

How Big Is the CDS Market?

The market for single-name CDS, which covers one company or government, is valued at around $9 trillion, according to ISDA.

While that may sound huge, it’s small compared to the global bond market, where more than $150 trillion in debt is outstanding.

• Government CDS are the most heavily traded

• In Q3, Saudi Arabia topped the list with about $500 million traded daily

• Among companies, banks dominate the CDS market — but Oracle is now in the top 20

Oracle’s CDS trading volume averaged $75 million per day in Q3, a massive 650% increase from last year, based on DTCC data.

This market can be thinly traded, meaning even small trades can cause significant price swings — which makes the recent surge even more notable.

Who Actually Buys CDS?

Typically, bond investors purchase CDS through investment banks. The bank finds another financial institution willing to sell the protection.

The buyer pays regular premiums, and in return, the seller covers losses if:

• The company goes bankrupt

• A bond payment is missed

• Another defined “credit event” occurs

Because CDS spreads widen when risk increases, they are often used as an early warning signal for financial stress.

Right now, Oracle’s CDS trades near 126 bps, significantly higher than:

• Nvidia — around 37 bps

• Meta — around 50 bps

This gap suggests investors view Oracle’s credit risk as far more elevated than other AI-related companies.

Some hedge funds, including Boaz Weinstein’s Saba Capital, have been active sellers of credit protection on large tech names, according to Reuters sources.

What Triggers a CDS Payout?

A payout happens when a credit event occurs, such as:

• Bankruptcy

• Failure to make interest payments

• Debt restructuring in some cases

CDS prices move continuously, and rising spreads typically reflect increasing market concern about an issuer’s financial health.

A Flashback to the 2008 Financial Crisis

CDS gained global attention during the 2008 crisis. Major Wall Street firms like Lehman Brothers and Bear Stearns had issued large amounts of CDS tied to mortgage-backed securities.

When U.S. mortgage defaults surged, the underlying securities collapsed in value — but the banks still owed massive insurance-like payouts on the CDS they had sold.