A wave of concentrated selling in AI-related stocks unexpectedly became the biggest tailwind for the U.S. Treasury market.
On Thursday, as earnings reports from several technology giants raised questions about the sustainability of AI capital expenditure, Treasury yields fell sharply across the curve, with two-year to 10-year yields each dropping more than 15 basis points in a single day — the largest one-day decline in over a year — giving Treasuries their best single-day performance since August 2025.
The 10-year Treasury yield fell back below 5% for the first time in nearly a month.
Goldman Sachs' Rich Privorotsky, in a morning note to institutional clients, characterized this phenomenon as "remarkable reflexivity" — every dollar of retreat in AI capital expenditure means a reduction in potential bond supply, directly easing pressure on the bond market.
In Privorotsky's view, when the scale of debt issuance by hyperscale cloud computing companies has become comparable to that of U.S. Treasuries, any contraction in AI capital spending is essentially equivalent to reducing potential supply pressure in the bond market, with an effect akin to a round of quantitative easing.
Earnings Trigger Selloff, Multiple Signals Shake Market Confidence
The trigger for this round of technology stock declines came from a series of uneven earnings signals. According to Goldman Sachs' Privorotsky, at least five factors weighed on the market.
First, Lam Research (NASDAQ: LRCX) delivered strong results but failed to break through the market's implicit upper bound of expectations, and its guidance offered no clear upside, sending Tokyo Electron shares down more than 6.99%.
Second, Tesla (NASDAQ: TSLA) cut its full-year capital expenditure guidance from over $25 billion to approximately $20 billion, a clear divergence from positive signals previously released by SpaceX, and the market reacted with particular sensitivity to the capital spending pullback.
Third, Meta (NASDAQ: META) reported broadly acceptable results and raised the lower bound of its full-year capital expenditure guidance to $135 billion, but this implies fourth-quarter spending alone would need to reach $49 billion to $59 billion, and the sheer scale raised doubts about execution feasibility.
Fourth, Texas Instruments (NASDAQ: TXN) posted excellent results with a full recovery in analog chips and strong data center demand, yet the stock reaction was muted.
Fifth, DeepSeek's open-source reasoning model DeepInfer claimed it could substantially improve inference efficiency on existing computing power, thereby unlocking idle capacity and prompting the market to reassess the necessity of incremental computing demand.
Privorotsky's summary was:
None of the above factors alone would be considered disruptive, but combined they are enough to shake already fragile market sentiment.
He noted that before Wednesday's modest bounce, the semiconductor sector had fallen in 10 of its previous 11 trading sessions, and that rebound "was already showing signs of fatigue."
Goldman Sachs Prime data showed that AI-related assets' net exposure as a share of total global net exposure had fallen from a peak of about 31% this summer to roughly 25%, while the long-short ratio compressed from over 4.2 to about 3.2.
Dragged by the above news, the Philadelphia Semiconductor Index fell more than 7% on Thursday. Intel (NASDAQ: INTC) and AMD (NASDAQ: AMD) dropped more than 8%, while Qualcomm (NASDAQ: QCOM) fell more than 3%.
The Intrinsic Link Between AI Capital Spending and Debt Supply
Privorotsky's analysis touches on a deeper market structural logic: the scale of AI capital expenditure is already directly affecting the supply-demand balance in the bond market.
The case of Meta is particularly illustrative. In the third quarter alone, Meta added $76 billion in off-balance-sheet commitments, primarily lease liabilities, bringing total off-balance-sheet commitments to $747 billion.
At the same time, Meta has joined Amazon in the camp of negative free cash flow. Meta's chief financial officer warned on the earnings call that "significant investment" would drive up service costs, and Meta shares immediately gave back most of their after-hours gains following the remark.
In Privorotsky's view, when the scale of debt issuance by hyperscale cloud computing companies has become comparable to that of U.S. Treasuries, any contraction in AI capital spending is essentially equivalent to reducing potential supply pressure in the bond market, with an effect akin to a round of quantitative easing.
He drew a conclusion unsettling to stock bulls: if the interest rate problem can only be alleviated when AI stocks fall, the bond market is in effect objectively "benefiting from" the ongoing downturn in the AI trade, and the Federal Reserve, busy raising rates, will not step in to rescue the market on its own initiative.
Multiple Tailwinds Converge for Treasuries, Option Costs Surge
Beyond the AI stock selloff, the ongoing escalation of France's sovereign debt crisis also provided additional support for Treasuries.
The spread between French 10-year government bond yields and German bunds of the same maturity widened to more than 170 basis points at one point, the highest level since the 2011 European debt crisis, and combined with a wave of cost-of-living protests in France, drove capital toward Treasuries and bunds as safe havens.
In addition, market expectations for a Fed rate hike next year also moderated, with traders now fully pricing in a 25 basis point hike in January rather than the previously expected December move.
Against this backdrop, the cost of hedging Treasuries with options surged to the highest level since March on Thursday, and after the 10-year Treasury yield fell below 5%, traders spent approximately $7 million in option premiums to establish positions betting the 10-year yield would fall to around 4.6% within a month, with contract size of about 65,000 lots.
Meanwhile, CME data showed large-scale new short positions in long-bond futures, and the relevant shorts faced forced cover pressure as Treasuries rallied, further fueling the advance.
Although Brent crude rose back above $112 per barrel after attacks on Saudi Arabia, in the view of Citi rates derivatives strategist Michael Chang:
Treasuries are demonstrating genuine safe-haven asset characteristics, which is an encouraging signal for the rates market.
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