Banks are buying credit default swaps from Boaz Weinstein’s Saba Capital Management to protect against potential losses on tech giants like Oracle and Microsoft amid a debt-fueled AI investment frenzy. Despite concerns, current prices indicate low default risk compared to other sectors.

Large asset managers are also interested in purchasing credit default swaps on tech companies like Meta, Amazon, and Google parent Alphabet. Microsoft declined to comment, while Meta, Google, Amazon, and Oracle did not immediately respond to requests for comment.

The surge in AI company valuations and increasing debt burdens has led to a rush to hedge against a potential bubble burst that could impact equity markets. Banks are seeking protection against the rising debt levels of tech companies funding multi-billion-dollar AI projects.

Equity derivatives trading has seen a rise in client demand for hedging protection against the tech sector. Concerns about increased AI corporate bond supply and hedging positive AI positions are driving the demand for credit default swaps in the tech industry.

Credit default swaps for big tech names like Oracle, Alphabet, Meta, and Microsoft have seen an increase in trading levels recently. Despite the surge, analysts note that current levels are still lower than those for some investment-grade firms in other sectors.

Hyperscalers, large AI tech firms, have seen a significant increase in borrowing in recent weeks. Meta raised $30 billion in debt, Oracle raised $18 billion, and Google owner Alphabet also tapped the market. The sector’s bond issuance in September and October alone was double the annual average.

While concerns about a potential AI bubble persist, bond yield spreads for hyperscalers remain below the aggregate investment-grade credit. Some analysts highlight the healthy balance sheets of hyperscalers, while others see them as a risky short in the market.

Read more at Yahoo Finance: Exclusive-Weinstein’s Saba sells credit derivatives on Big Tech as AI risks grow, source says