Most stock traders never look at the credit markets. But right now, the credit market is showing some signs of concern, and everyday investors should be listening, especially as AI stocks have been under selling pressure.
So let’s break down what the credit markets are saying for speculative (CRWV), middle-of-the-road (ORCL) and “safe” (META, GOOG) stocks …
What Is a Credit Default Swap?
A credit default swap (CDS) is insurance on a company’s debt. It’s quoted in basis points (1 bp = 0.01%), so a 100-bp spread costs $100,000 a year to insure $10 million of debt. The higher the number, the more worried the market is. And bond investors tend to spot trouble before stock investors do, which makes CDS one of the best early warning systems an everyday investor can watch.
Options traders will appreciate this: A CDS is essentially a put option on a company’s debt.And since bondholders get paid before stockholders, when credit gets nervous, stocks feel it.
[text_ad]
The Speculative Stock: CoreWeave (CRWV)
CoreWeave’s five-year CDS hit a record on October 15 of about $1 million a year to insure $10 million of its debt. S&P Global Market Intelligence estimates that implies roughly a 64% chance of default over five years. That’s a market-implied number, not a forecast, but the bond market is clearly treating CRWV as a speculative credit, with its 2031 bonds yielding 14% to 16% in mid-October.
And not surprisingly, because of these perceived risks, CRWV stock is trading at a multi-year low.
The Middle Ground: Oracle (ORCL)
Think of a credit rating as a report card for borrowers. Oracle still has a passing grade, what Wall Street calls “investment grade,” but just barely. In July, S&P lowered Oracle to BBB-, the last passing grade before “junk.”
The bond market is even more skeptical. Insuring $10 million of Oracle’s debt now costs about $292,000 a year, more than triple what it cost a year ago. That’s the kind of price usually reserved for junk-rated companies.
Why the worry? Oracle has borrowed heavily to build AI data centers and now owes about $125 billion. And on Monday it said it plans to raise another $20 billion by selling new stock and bonds.
Watch Oracle’s CDS like a thermometer. If it keeps rising and Oracle gets downgraded to junk, many bond funds that can only own investment-grade debt would be forced to sell, and that pressure could spill into the stock.
The “Safe” Stocks: Meta (META) and Alphabet (GOOG)
Even the strongest names in tech are seeing record insurance costs. Insuring $10 million of Meta’s debt cost about $119,000 a year at its late-October peak. For Alphabet, Google’s parent company, that cost has nearly tripled in a year to about $92,000.
But those numbers are a fraction of the more than $1 million it costs to insure the same amount of CoreWeave debt, so it’s not as if traders are racing to buy insurance on the slight chance that Meta and Google are going out of business.
Still, Alphabet just had its worst day ever on October 29, falling 12.6% after reporting that it spent more cash than it brought in last quarter, so it’s possible that traders are getting concerned about the company’s spending now and in the future.
Don’t Trade CDS, But Watch Them
The CDS market is often the canary in the coal mine, and right now that market is getting a bit worried about the spending and future of leading AI companies.
Now you don’t need to trade CDS to use them. Instead, check them like a weather report, and when the forecast turns stormy, make sure you have an exit plan for your stock and options positions.
[author_ad]
