By Joy Wiltermuth

The next hot AI play could be adding default protection

A Meta logo is pictured during the International AI Summit in Dublin, on Oct. 14, 2026.

The hot new artificial-intelligence play might be adding default protection as investors anxiously await Meta to kick off earnings for the big "hyperscalers" of the artificial-intelligence race.

Hyperscalers and their spending plans used to set the tone for corporate earnings season, with stocks rallying on a "more is better" view. But that was before billions of dollars in debt was issued by the biggest AI players - before market indigestion and cracks began to appear in funding structures of CoreWeave and other riskier parts of the boom.

Jitters also appear around the AI market's leaders.

This comes as nearly $450 billion in AI-related debt has been issued globally this year. Last year's total was only about $216 billion, according to Morgan Stanley data.

Meta (META), which reports earnings Wednesday afternoon, saw its five-year credit-default swaps trade at a spread of 111.57 basis points on Tuesday, up from 68.23 on April 20, according to Dow Jones Market Data. That compares with Alphabet (GOOG) and Amazon's (AMZN) five-year CDS at about 80. That means it now costs $111,570 a year for insurance on $10 million in Meta debt - 62% more than six months ago.

Among the riskier, more highly leveraged AI names, Oracle's (ORCL) five-year CDS was close to 320 basis points, while CoreWeave's (CRWV) was at about 1,082 basis points, which suggests heightened default risks.

"Investors feel they need some hedging," Nick Elfner, co-head of research at Breckinridge Capital, said in a phone interview. "It's a relatively affordable way to hedge if you own the bonds," he said. It also can be a way to speculate on credit quality, he added.

Credit-default swaps proliferated in the lead-up to the 2008 global financial crisis, then shrank in its aftermath and have since staged a comeback. They are now in vogue among investors seeking protection after heavy AI-debt issuance kicked off in earnest.

Credit-default swaps are derivative contracts that let one party buy "protection" against things like a corporate default, while the other party is the protected seller. Contracts can also be written against a basket of related companies or an entire index of corporate-debt issuers.

When spreads on credit-default swaps widen, it signals investors are more nervous about the ability of an issuer or industry to service its debt - and they are demanding to be paid more. That tends to be an early warning for investors in a company's stock, who often have the most to lose if there is a default.

While there isn't a dedicated AI credit-default-swaps index, many of the sector's big issuers already have been included in the broader investment-grade "CDX index." Wall Street has been offering investors select exposure to some "AI baskets."

Spreads for an AI basket have been trading wide to levels for the broader investment-grade corporate index, as seen in the chart below from Morgan Stanley.

Buying CDS protection "remains our preferred way of playing the AI story in the credit derivatives market," a Morgan Stanley team wrote in an Oct. 1 research report.

The global credit-default swaps market reached a record size of about $42 trillion in 2025, according to the International Swaps and Derivatives Association, a trade group for custom "over-the-counter" derivatives.

Along the way, single-name CDS trading activity in the technology sector has grown to 9% of total market risk activity in the first nine months of 2026, from 4% in 2025, according to Olga Roman, head of research at ISDA. Her analysis is based on trade information warehouse data from the Depository Trust & Clearing Corporation.

Still, buying more protection against potential credit risks won't necessarily precipitate a slowdown in the AI build-out, according to Howard Mason, a financial analyst at Renaissance Macro Research.

After all, hyperscalers are doing the heavy lifting, not the relatively "tiny" segment of AI companies with below investment-grade credit ratings, where spreads have gapped out considerably, he said.

"The concern about a slowdown in the AI build-out is simply misplaced," Mason said.

Meta didn't respond to a request for comment.

Ken Jimenez contributed

-Joy Wiltermuth

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10-21-26 1005ET