Last week, as market concerns over the outlook for leading AI companies intensified, the 10-year Treasury yield fell about 17 basis points over the week, while the Nasdaq 100 index tumbled 5.5% over the same period.
The last time the yield and the tech benchmark index saw such a synchronized decline of this magnitude in the same week was during the tariff storm of April 2025.
For the past several months, Treasuries had almost lost their traditional hedging function during periods of stock market stress. Now, turbulence in the AI trade has brought about a turning point in that situation.
Cracks appear in the AI trade, shifting the logic of the bond market
The core narrative driving this round of bond market rebound comes from the loosening of the AI trade itself.
Signs of slowing revenue growth at Anthropic, along with the continued decline in bond prices of AI cloud computing provider CoreWeave, have led the market to begin questioning: is the AI boom that drove the bond market selloff now showing cracks?
Over the past several months, the AI investment frenzy has pressured Treasuries from two directions: on one hand, massive AI infrastructure buildout has boosted the economy, and surging chip demand has intensified inflationary pressure; on the other hand, companies have flooded into the credit bond market to finance AI projects, competing with Treasuries for capital. According to Bloomberg data, investment-grade corporate bond issuance this year has grown about 29% compared with the same period last year, with tech giants being the main issuers.
Julius Baer fixed income strategist Afonso Borges wrote in a report: "An AI-led economic downturn would be closer to a traditional negative demand shock," and would become a catalyst for disinflation. He pointed out that under such a scenario, "intermediate-term Treasuries should once again be able to play an effective portfolio hedging role." On this basis, the firm recommends an overweight position in intermediate duration, and cited data showing that between 2000 and 2020, 10-year Treasuries consistently posted positive returns during stock market pullbacks.
John Briggs, head of North America rates strategy at Natixis, explained this logic from the supply perspective: "If investors find that the AI-related bonds they hold are depreciating, their willingness to buy new bonds will decline. This reduces the impact of AI issuance on the market in the short term, and as a result more capital flows into long-end Treasuries, easing concerns about supply crowding out."
Short covering amplifies the rally
This round of bond market rebound was not driven solely by safe-haven demand; the positioning structure also played a significant role.
According to Bloomberg, last week's bond market rally was boosted by large-scale short covering by CTA (commodity trading advisor) funds — these funds had previously held unusually aggressive short positions in Treasuries. The buying generated by short covering further amplified the downward move in yields and significantly increased two-way risk in the bond market.
Marlborough Investment Management portfolio manager James Athey, citing a famous quote from Mark Twain, commented: "To paraphrase Mark Twain, reports of the death of Treasuries have been greatly exaggerated."
Rate hike expectations cool, but divergence remains
The influx of safe-haven capital also partly offset the pressure on the bond market from inflation data.
Consumer price data released last week came in above expectations, briefly pushing the market-implied probability of a Fed rate hike this month to about 50%. But as the stock market selloff intensified, that probability quickly fell back.
Fed Chair Warsh subsequently appeared at the IMF annual meeting, but apart from reiterating that the Fed is committed to achieving price stability, he made no comments on the direction of monetary policy or the economic outlook. The market still expects the Fed to hike rates once more this year and tighten again in 2027.
Standard Bank G-10 strategy head Steven Barrow characterized this round of bond market rebound as a "red herring" — that is, a misleading signal. He pointed to inflation risks ahead, as well as the structural trend of long-term capital migration from sovereign bonds to equities.
The sharp rise in oil prices last Friday also highlighted the risk: driven by the Iran war situation, oil prices surged, rekindling inflation concerns, and Treasuries and U.S. stocks briefly weakened in tandem — doubts over President Trump's deal to push Russian diesel into the global market caused crude prices to jump suddenly around midday.
A long-term investor's perspective
For short-term traders, the outlook is full of uncertainty.
Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo, pointed out that Warsh's monetary policy style of not providing forward guidance — a core principle of his policy framework — makes the market more prone to large price swings.
But he also said that for long-term investors, "the situation is different." "If a larger AI-driven risk-off episode occurs, Treasuries look increasingly capable of providing the hedging function investors have been missing for the past few years."
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