Following NVIDIA's $25 billion corporate bond issuance in June, derivatives tied to the AI chip giant have now become among the most actively traded instruments in the US credit default swap market, as investors seek to hedge against debt exposure. According to DTCC data cited by Nicholas Godec, head of fixed income tradable products and commodities at S&P Dow Jones Indices, market participants traded credit protection on $6.9 billion of debt over the past six months, up from just $640 million in notional volume in the prior six-month period.

The surge in trading volume is the primary reason NVIDIA was added to S&P's latest CDX investment-grade index, which took effect Monday. NVIDIA is now one of the most liquid constituents in Series 47 of the index, which serves as a barometer of market-perceived credit risk. Other companies in the same series include tech giants Oracle, Amazon, Google, Broadcom, Meta Platforms, and Microsoft.

"There has been tremendous growth in CDS trading volume related to these companies," Godec said. "And with ongoing financing activity in areas like data centers, there are no signs this trend will slow down anytime soon." Six companies joined the index alongside NVIDIA this week, including SpaceX, with both firms having issued $25 billion in investment-grade bonds in June.

When S&P Dow Jones Indices rebalances the CDX index each March and September, it evaluates multiple factors including CDS liquidity, credit ratings, and the debt structure of issuers. Newly added constituents reset the index's maturity profile and typically boost trading activity. This index adjustment, combined with rising US Treasury yields, has led to a widening of the index's spreads.

Demand for credit default swaps comes from investors seeking to hedge against potential losses arising from the growing debt burden of hyperscale cloud providers. At the same time, Wall Street banks are purchasing credit protection to reduce their own exposure to these borrowers, allowing them to continue expanding business relationships with these companies.

So far this year, the cost of default protection on NVIDIA's debt has doubled following heavy borrowing and a series of AI-related infrastructure deals announced by the company, raising investor concerns about its overall debt load. "For anyone looking to hedge AI-specific risk, trading volume in AI-related single-name CDS contracts has been nothing short of extraordinary," said Jigar Patel, macro credit strategist at Barclays. "I think this makes them better hedging alternatives." S&P Dow Jones Indices' swap index for the US high-yield market is adjusted twice annually, with the next adjustment expected on Monday.