Rising debt risks trigger a hedging wave! NVIDIA Corporation (NVDA.US) CDS ranks among the most actively traded instruments in the U.S. market.

After NVIDIA Corporation (NVDA.US) issued $25 billion in corporate bonds in June of this year, derivatives tied to the AI chip giant have become one of the most actively traded instruments in the U.S. credit default swap (CDS) market as investors seek to hedge their debt exposure. Nicholas Godec, head of fixed income tradables and commodities at S&P Dow Jones Indices, citing DTCC data, said that over the past six months, market participants traded credit protection on $6.9 billion of debt, compared with a notional trading volume of just $640 million in the prior six-month period. The surge in trading volume was the main reason NVIDIA Corporation was included in S&P's latest CDX investment-grade index, which officially took effect on Monday. NVIDIA Corporation is one of the most liquid constituents in the index's Series 47, which is used as a gauge of market-perceived credit risk. Other companies in the same series include technology firms Oracle Corporation (ORCL.US), Amazon.com, Inc. (AMZN.US), Alphabet Inc. Class C (GOOGL.US), Broadcom Inc. (AVGO.US), Meta Platforms (META.US) and Microsoft Corporation (MSFT.US). "The CDS trading volumes associated with these companies have seen tremendous growth," Nicholas Godec said. "And with financing activity continuing in areas like data centers, there is no sign that this trend will stop in the near term." Among the six companies that joined the index alongside NVIDIA Corporation this week was SpaceX (SPCX.US), with both companies issuing $25 billion in investment-grade bonds in June. AI boom drives up debt risks for NVIDIA Corporation, SpaceX When S&P Dow Jones Indices rebalances the CDX index each March and September, it considers multiple factors, including CDS liquidity, credit ratings and issuers' debt structures. Newly added constituents reset the index's tenor and typically boost trading volume. This index adjustment, combined with rising U.S. 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 from the growing debt of hyperscalers. At the same time, Wall Street banks are also buying credit protection to reduce their own exposure to these borrowers, enabling the banks to continue expanding their business with these companies. So far this year, the cost of insuring NVIDIA Corporation's debt against default has doubled following heavy borrowing and the company's announcement of a series of AI-related infrastructure deals, prompting investor concerns about its overall debt burden. "The trading volumes in AI-related single-name CDS contracts have been astonishing for anyone looking to hedge AI-specific risk," said Jigar Patel, a macro credit strategist at Barclays. "I think this makes them a better hedging alternative." S&P Dow Jones Indices' swap index for the U.S. high-yield market is adjusted twice a year, with the next adjustment expected on Monday.