2 min read
The tech trade could have some sharper down days ahead if the red flags in the bond market are to be believed.
Hyperscaler credit default swaps continue to widen, BTIG strategist Jonathan Krinsky pointed out. Investment-grade tech credit default swaps are now the widest they’ve been since 2022.
Yet, the S&P Tech Sector is just a few percentage points below its highs — essentially shrugging off the worries being expressed in the bond market.
A credit default swap (CDS) acts as insurance against a corporate borrower defaulting on its debt. When a CDS spread widens, buying that default insurance becomes pricier. It means institutional credit investors perceive higher credit risk, worsening balance sheet health, or rising debt loads.
The backdrop for tech stocks has become increasingly choppy in October.
Concerns began earlier this month with neocloud company CoreWeave (CRWV).
The company’s corporate bonds across maturities continued to be dumped amid fears of an AI slowdown and its implications for the company’s precarious balance sheet. That has triggered a subsequent sharp sell-off in the stock.
54.24 -1.36 (-2.46%)
At close: October 23 at 4:00:01 PM EDT
53.01 -1.23 (-2.26%)
Pre-Market: 8:22:09 AM EDT
CRWV META ^IXIC
CoreWeave stock has been crushed by 35% in October.
Meta (META) then dropped a bombshell in its third quarter results last week, posting negative free cash flow for the first time since 2012 amid aggressive spending on AI.
On Friday, the tech-heavy Nasdaq Composite (^IXIC) closed below last Friday’s low — a red flag to chart watchers.
“The reality, of course, is that it is hard to identify the exact trigger for an AI crash. But we can model the fallout. In terms of financial markets, the impact is likely to be sizable,” TS Lombard strategist Dario Perkins warned in a new note. “US stocks would be hit hard, with (at least) a 30% decline. That would wipe out around $20 trillion in market cap.”
Across debt markets and private credits, he estimated “$125–200 billion in losses. Spreads would blow out, and we should expect a wave of tech-related defaults.”
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