Unrelated to AI, but still needing to pay up! The wave of debt issuance from US tech giants spills over, with CDS for steady companies like luxury goods and pharmaceuticals rising by over 10%.

Noting that as the flood of debt issuance from American tech companies continues to spread through the credit market, the risk indicators of some of the safest companies globally are being inadvertently pushed higher. Banking strategists at BNP Paribas indicated that these developments are a chain reaction intensified by the cash competition in the top credit sector. As tech giants unleash a borrowing frenzy worth billions of dollars, this competition has even raised the costs of credit default swaps (CDS) for companies unrelated to data centers or artificial intelligence. Although BNP Paribas did not disclose the specific companies used in its analysis, aggregated data shows that since the end of last year, the CDS spreads for luxury goods giant LVMH, pharmaceutical firm Sanofi, and defense contractor BAE Systems have risen by more than 10%. BNP Paribas head of European credit strategy, Josh Faber, stated, All high-quality credit entities are competing for capital with these super-large tech companies, adding that sovereign debt may ultimately be affected as well. CDS with some of the narrowest spreads in Europe underperformed the index Fabers analysis of the iTraxx Europe high-grade corporate CDS index indicates that the competition for investor funds may be giving rise to a super trenda convergence of spreads toward the index mean. The bank recommended a two-pronged trading strategy to clients: buying a basket of low-spread targets while selling index default protection. Looking solely at the risk premium of the CDS index, this trend is not intuitivecurrent index premiums are approaching the narrowest levels seen in nearly 20 years. Part of the reason is that trading in the lower-rated credit sector has become crowded, pushing down its default protection costs. However, at the top of the corporate bond market, the competition for investors' attention has heated up significantly. Meta, Alphabet, and Amazon have issued tens of billions of dollars in bonds this year in various currencies to fund their AI business expansion. Among these super-large tech companies, only Oracle has a rating below AA. The CDS index covers a basket of component entities, with trading independent of the underlying borrower contracts, making it one of the most liquid tools in the credit market, with hundreds of billions of swaps transacted daily used to hedge risks or express directional views. A convergence of spreads toward the index mean indicates that when the market deteriorates, the buffer in these key risk indicators will be significantly compressed. AI companies have rapidly ascended to the ranks of top borrowers While BNP Paribas's research focuses on the European CDS index, Faber noted that the competition for capital is a global phenomenon. Super-large tech companies eager to rapidly expand in the AI arena are on all fronts to raise funds, almost overnight becoming top borrowers in markets such as the UK, Japan, and Switzerland. For some market participants, the surge in debt supply from tech giants and its cascading effect on spreads may just be the catalyst needed to disrupt the current calm in the credit market. Andrea Seminala, CEO of hedge fund Redhedge Asset Management, remarked, Compared to the past few years, this serves as a real wake-up call for the credit market. The sustained narrowing of market spreads and the lack of volatility cannot continue indefinitely. According to Bloomberg indices, the current spread on global investment-grade corporate bonds is about 80 basis points, only about 6 basis points above the post-financial crisis low reached earlier this year. Corporate bond risk premiums generally move in tandem with corresponding default protection costs, though the magnitude of change may occasionally differ. When competition for capital drives up the financing costs of globally safe companies, their CDS spreads are bound to follow suit. Seminala stated, If the spreads on newly issued U.S. corporate bonds widen, it could lead to a repricing across the entire investment-grade market. It is important to clarify that bankers underwriting new bonds for these super-large tech companies have taken measures to ensure that the bonds perform steadily after hitting the public market, such as avoiding buyers like hedge funds that seek quick returns. However, Wall Street analysts generally expect that more debt issuance from tech companies is likely to occur later this year or next year, which may further pressure existing bonds, related CDS, and the overall market. Faber remarked, The broader question is how should investors view this batch of entities with extremely narrow spreads? This has woken the market up: taking on risk at current levels offers very little return.