US Treasuries are showing tentative signs of reclaiming their role as a haven after an AI-driven stock selloff, threatening investors positioned for a bond slump to deepen. 10-year yields fell about 17 basis points last week, while the Nasdaq 100 tumbled 5.5%. The rally was notable after months when Treasuries largely failed to provide customary protection during stock struggles. Inflation, a resilient economy, and heavy corporate and government borrowing pushed 10-year yields to their highest levels in over two decades. The wobble in stocks upset that trend partly because investors held unusually aggressive bearish Treasury bets, raising the prospect of short covering and heightening two-way risk even as inflation remains solid.
James Athey of Marlborough Investment Management said, 'To paraphrase Mark Twain, rumors of the death of US Treasuries are greatly exaggerated.' It's tough to conclude the AI boom is ending, as previous volatility proved short-lived. But concerns over slowing revenue growth at Anthropic PBC and sinking debt prices at Core Weave Inc. are raising questions about cracks in the trade that helped drive the bond rout. Massive AI investment has boosted the economy while surging chip demand added inflationary pressures.
Afonso Borges of Julius Baer wrote an AI-led downturn could be closer to a traditional negative demand shock and a catalyst for disinflation. He recommended an overweight duration stance in intermediate Treasuries, noting they consistently delivered positive returns during equity drawdowns between 2000 and 2020. However, the deluge of corporate issuance to finance AI infrastructure has increased competition for capital. Investment-grade companies led by mega-cap tech firms have sold about $1.7 trillion of bonds this year, up some 29% from last year. If investors see their AI-linked bonds losing value, they will be less interested in buying new ones, reducing AI issuance and increasing demand for the Treasury long end.
Trader positioning could amplify bond strength if the AI trade extends its weakness. Commodity trading advisers exiting bearish futures positions helped relieve pressure on bonds from persistent inflation. Hotter-than-expected consumer prices initially prompted bets the Federal Reserve would lift rates this month, pushing the probability near 50%. As the stock selloff intensified, the perceived chance of an October hike diminished, dwindling further after Chairman Kevin Warsh appeared at the International Monetary Forum.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing