Wall Street's Debt Problem Could Cause Big Losses

Analysis of the situation

The topic is about financial markets

It happened on Thursday, August 6, 2026, at 5:01 am

Investors are worried about a big tech company collapse, which is shown by credit default swaps.

Wall Street has a lot of debt, which could hurt people's retirement savings.

Big tech companies have over $600 billion in debt, causing warning signs.

Debt must be paid back eventually.

Credit default swaps show the chance of debt not being paid back.

It's like insurance for lenders to avoid big losses if the borrower fails.

The cost of this insurance for big US tech companies is very high.

This means investors think there's a big risk of a debt default soon.

Australia's $4.5 trillion superannuation industry is at risk because of this.

Australians' retirement investments are connected to US tech stocks.

The numbers are not good

Credit default swaps help investors reduce the risk of a company failing.

After buying a CDS contract, the buyer pays an annual fee based on the insured amount.

For example, a 1% CDS on a $2 million loan means the buyer pays $20,000 per year.

Australia's biggest companies will soon show how they did financially.

There's a limit to how much a borrower will pay for a credit default swap.

The demand and price for these financial products are increasing.

The global credit default swap market reached a record $41.8 trillion in 2025.

It has only grown since then.

The move in US treasury yields is also causing anxiety among investors.

This has led to fears that a debt bomb could wipe out years of market gains.

There's a shift to debt financing

Big tech companies' debt-fueled spending on data infrastructure is a concern.

These companies are relying more on debt than share markets for funds.

ASIC's executive director said credit default swap prices show investors are cautious.

The total debt for the seven big tech companies is $671.9 billion.

These companies have doubled their debt issuance in the past six months.

The AI hype cycle was initially funded by a few big tech companies, but now others are borrowing to build the AI infrastructure.

As big tech issues more debt for AI spending, investors are seeking more protection against credit risk.

Widening credit default swap spreads mean the contracts are becoming more expensive.

Oracle is at the center of this issue

Oracle's credit default swaps have drawn the most interest from the market.

In September last year, Oracle made a $300 billion cloud deal with Open AI.

Investors are concerned about how much debt Oracle is using for its deals.

The cost of issuing debt has risen for big tech companies like Oracle.

There are concerns that tech companies are doing circular financing.

For example, Microsoft finances Open AI but also uses its models in its cloud services.

If one big company in this circular flow fails, it could take others down.

A delay in AI pay-off could trigger a market-wide equity re-rating.

Credit metrics are getting worse

US investment fund founder Dan Rasmussen is watching US debt markets closely.

He's concerned that big tech companies are taking on more debt as revenues fall.

The credit metrics are deteriorating, with free cash flow to debt metrics getting worse.

Free cash flow is revenue that can directly go into a company's books as cash.

If investments don't work out, these ratios will get worse.

Oracle is the most leveraged and worst positioned due to limited free cash flow.

Is there a systemic risk?

The problem for Australians with superannuation is that roughly 20% of it is tied up in Wall Street.

The Magnificent Seven represent around 30% of the US stock market.

Credit default swap prices show there are risks to this exposure.

The rising cost of debt in the US is also a growing risk for these companies.

As debt costs increase, so does the risk of default.

Sonal Desai manages over $215 billion in assets and says bond market yields have moved to levels consistent with the macro-outlook.

She says markets are taking stock of higher policy uncertainty and priced the potential for higher inflation.

There will be an additional source of volatility on top of what's already generated by uncertainty.

Vanguard Capital Management's chief investment officer cautions against over-dramatizing the threat of debt-laden big tech.

He says their commercial and equity market success coexists with meaningful differentiation at the company level.

They share a label, not a business model.

See more ABC coverage

Promotion

Dinleme pratiği

Dinleme pratiği