Let’s look at the numbers. They tell a story of both incredible optimism and deep-seated anxiety. The central character in this tale, for now, is tech behemoth Oracle. The company is spending billions to build the AI dream, but the financial markets are starting to ask some very pointed questions about the bill. Understanding these tremors is crucial to navigating the growing AI investment bubble risks.
Untangling the AI Investment Boom
First, what even is an investment bubble? Think of it as a market frenzy where the price of an asset—be it Dutch tulips in the 1600s, dot-com stocks in the late 90s, or AI capacity today—soars far beyond its fundamental value. The logic becomes circular: prices are high because everyone expects them to go higher. The dot-com bubble was fuelled by a mantra of “get big fast,” where user numbers, or “eyeballs,” were more important than actual profit.
Are we seeing a sequel? The script is a bit different. This time, the mantra is “build big fast.” Companies are undertaking monumental capital expenditure to build data centres and secure GPUs, believing it’s the necessary price of admission for a future dominated by AI. The problem, as ever, is that the spending is happening now, while the promised productivity gains and profits remain stubbornly on the horizon. This gap between expenditure and return is where a bubble inflates.
Oracle: A Canary in the AI Coal Mine?
The most telling sign of this growing unease comes from a bit of financial wizardry called a credit default swap, or CDS. Let’s make this simple. A CDS is basically an insurance policy on a company’s debt. If you think a company might struggle to pay its bills, you can buy a CDS. If the company defaults, the policy pays out. The cost of this “insurance” is a direct reflection of the market’s perceived risk.
Well, the cost of insuring Oracle’s debt has just skyrocketed. According to a recent Bloomberg report, Oracle’s CDS spread recently hit 1.28 percentage points, the highest it’s been since the financial crisis in March 2009. To put it plainly, the Wall Street “smart money” is now more worried about Oracle paying its debts than at almost any point in the last 15 years.
Why Oracle? The company has been on a borrowing spree, issuing around $18 billion in bonds to fund its AI infrastructure ambitions. This has pushed its total debt, including leases, to an eye-watering $105 billion. It’s a huge bet, and the CDS market is screaming that the risk is rising.
Reading the Market’s Mood Music
This isn’t just about one company. Oracle’s situation gives us a unique window into broader market volatility indicators and investor sentiment. The anxiety is palpable, shifting the ground beneath the entire tech sector.
A Flood of Hedging
The surge in Oracle’s CDS cost is only half the story. The other half is the sheer volume of trading. In a recent nine-week period, the trading volume for Oracle’s CDS exploded to $8 billion. For comparison, the volume in the same period last year was a mere $350 million.
This isn’t a niche activity. This is a stampede. As analysts at Citigroup point out, investors are becoming “increasingly concerned about how much more supply may be on the horizon.” It seems investors want to ride the AI wave but are simultaneously buying life rafts in case the whole ship goes down. This dual strategy—buying the stock, but hedging the debt—is a classic sign of a market that believes in the dream but fears the immediate reality.
As Hans Mikkelsen, a strategist at TD Securities, noted, “We’ve had these kinds of cycles before.” The pattern is a familiar one: a sector gets caught up in a spending binge, financed by massive debt, with promises of a future payoff. We’ve seen it in energy, telecoms, and now, it seems, in AI.
The Trillion-Dollar Question: Stability or Speculation?
This brings us to the core conflict between tech investment stability and financial risk management. The entire premise of this AI investment cycle is that spending billions on infrastructure will unlock trillions in future value. But what if that connection isn’t as direct or as swift as hoped?
Where are the Returns?
The bull case is that companies like OpenAI, powered by infrastructure from Oracle and others, will revolutionise entire industries. The problem is that while the spending is concrete and immediate, the profits are speculative and deferred. Bondholders, in particular, are in a precarious position.
As strategists from Citigroup rightly observed, those who lend money to these tech giants have limited ability to capture the massive upside if AI truly takes off. However, they bear the full brunt of the risk if the spending binge leads to credit deterioration. It’s a gamble where they’ve put down their chips for a chance to win back their original stake, while the equity holders are playing for the jackpot. Does that sound like a stable bet to you?
How to Navigate the Storm
For investors, this environment demands a sophisticated approach to financial risk management. Simply cheering on the AI boom without acknowledging the underlying credit risk is naive. The CDS market shows that large institutional investors are actively hedging against a potential downturn.
What does this mean for the future? Analysts are already forecasting a continued surge in corporate debt. US investment-grade bond sales are projected to reach as much as $2.1 trillion in 2026 if the current AI spending trend continues, as reported by Yahoo Finance. This debt has to be serviced, putting immense pressure on companies to turn AI hype into hard profit sooner rather than later.
The Oracle CDS story isn’t a prediction that the AI boom is over. Far from it. Instead, it’s a crucial warning sign. It shows that while the chorus sings the praises of AI, a very serious, well-capitalised group of investors is betting that the road ahead will be far bumpier than the optimists believe. The party is still going, but the credit markets are telling us the floorboards are starting to creak.
So, where do you stand? Is this massive AI investment the necessary foundation for a new economic era, or are we witnessing the inflation of the next great tech bubble? The answer will define the market for years to come.
What are your thoughts on a potential AI bubble? Share your perspective in the comments below
