Some of the most popular ways to hedge credit are breaking down just as concerns mount over the flood of artificial intelligence-linked debt. Investors have long relied on credit-default swap indexes as a quick and liquid way to protect themselves against losses. But those benchmarks have failed to reflect a surge in risk premiums on corporate bonds, according to data compiled by Bloomberg.
The widening gap means investors using the instruments to offset losses on their portfolios are getting less protection than expected. “Weakness in AI-related credit relative to the broader performing market has led many investors to question which hedges are best suited for their portfolios,” Goldman Sachs analysts led by Amanda Lynam wrote in a note to clients on Thursday.
The disconnect comes as trading in the world’s biggest credit market is increasingly focused on single-name credit default swaps tied to individual companies such as Amazon.com Inc., Meta Platforms Inc. and Alphabet Inc., whose historic borrowing binge to fund AI investment has created a new source of risk for traders. Spreads in the default swaps of so-called hyperscalers widened between 3 basis points and 9.8 basis points on Friday, while the North American investment-grade CDS benchmark rose by less than a basis point.
As AI fears mount, investors have preferred direct exposure to the dominant market factor rather than indexes that can move independently of their constituents. The correlation between the two has fallen to about half its five-year average.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing