Guide · Markets
Credit Default Swaps: How the Market Prices the Odds a Company Can't Pay
When CoreWeave's stock bounced 6% in October 2026, its credit default swaps were pricing a 60% chance of default within five years. Here is what a CDS is, how to read its price, and why credit markets often see trouble before stock markets do.
A credit default swap is insurance on a loan. The buyer pays a regular premium to the seller; if the borrower defaults — misses a payment, restructures or goes bankrupt — the seller compensates the buyer for the loss on the bonds. The premium, quoted in basis points per year on the amount insured, is called the CDS spread. A spread of 100 basis points means it costs $10,000 a year to insure $1 million of debt.
Because the premium rises and falls with the perceived risk of default, a CDS spread is a live market estimate of a borrower's creditworthiness — more responsive than a credit rating, which changes rarely, and more direct than a bond price, which also moves with interest rates. Investment-grade companies trade at tens of basis points; distressed borrowers at thousands, and for the riskiest names the premium is paid partly up front.
The spread can be converted into an implied probability of default. The rough rule is probability ≈ spread ÷ (1 − recovery rate), where the recovery rate is the share of face value creditors expect to get back, often assumed at 40% for corporate debt. A 600-basis-point spread and 40% recovery imply about a 10% annual default probability, which compounds to well over a third across five years.
October 2026 offered a live example. CoreWeave, which borrows to buy Nvidia chips and rent them out to AI customers, saw its stock fall 15.46% on October 14 and rebound 5.94% on October 15. On the second day, according to Yahoo Finance, its credit default swaps rose to a record that priced roughly 60% odds of default within five years, and its 9% notes traded at 80.75 cents on the dollar, a yield of 15.3%. The stock market and the credit market were telling different stories about the same company on the same day.
That divergence is why equity investors watch CDS at all. Bondholders care only about being repaid, so credit prices respond to cash flow, leverage and refinancing risk with less of the narrative that drives stocks. When spreads widen while the shares hold up, the bond market is usually the one to listen to; the reverse, shares falling while spreads stay calm, is more often a sentiment move.
Two cautions. CDS are traded between institutions, so the quotes you see in news reports are indicative, not prices you can deal at, and small or thinly traded names can have spreads that move on very little volume. And a CDS pays out on default, not on a falling share price: a company can lose most of its market value without ever triggering one.