The growing fear of an AI bubble bursting is reshaping the safe-haven logic of US Treasuries. Although US CPI data has continued to beat expectations, Treasury yields moved lower this week in tandem with a sharp selloff in tech stocks, producing a rare break in the traditional correlation between bonds and equities. That anomalous signal is pushing Wall Street to reassess the allocation value of US Treasuries.
The 10-year US Treasury yield fell more than 10 basis points on Thursday to 5.081%, touching a three-week low, after failing to rise a day earlier even following a hotter-than-expected inflation print and instead finishing flat. At the same time, the credit cracks in the AI supply chain triggered by the CoreWeave debt crisis continued to spread — the yield on the company's 2032-maturity bonds surged above 15%, its five-year CDS widened by 135 basis points, and the market-implied five-year default probability has reached 63%. Multiple analysts and investors are reassessing the overall financing risk exposure of the AI sector.
Goldman Sachs and Citi were the first to call for buying, with Morgan Stanley, Mitsubishi UFJ and Wells Fargo following in succession, arguing that Treasury yields are already in a range that offers allocation value. However, Bank of America and Barclays remain cautious, warning that the market is underestimating the probability of Federal Reserve rate hikes and stressing that high yields alone are not a sufficient reason for mechanical buying. UBS, meanwhile, maintained a tactically neutral stance.
AI Credit Cracks: The Trigger for a Safe-Haven Logic Shift
The core driver of this decline in Treasury yields does not come from an unexpected softening in inflation data, but from the rapid spread of credit risk across the AI supply chain.
CoreWeave has issued $22 billion in bonds and $26 billion in loans, and its debt crisis marks an escalation of this round of AI tech-stock selling from the valuation level to the credit level. D.A. Davidson analyst Gil Luria characterized CoreWeave as a "subprime asset in the AI space," warning that its blended borrowing cost is about 9% while the return on its asset investments is only around 1%, and that if it cannot keep rolling over its debt, there is a risk that its equity value goes to zero.
Fresh data from AI model company Anthropic also weighed on market sentiment. According to Bloomberg, citing people familiar with the matter, the company's third-quarter revenue reached $16.8 billion, but some analysts view that figure as below expectations. Hebe Chen, senior market analyst at Vantage Global Prime, said, "The market's disappointment with Anthropic's data reflects deep-seated concern about the capital burn required to sustain this growth."
Jung In Yun, chief executive of Fibonacci Asset Management Global, noted that "the stronger-than-expected US CPI print and the CoreWeave bond selloff are prompting investors to reassess financing risk across the entire AI industry."
Counterintuitive Market Logic: An AI Pullback Is Actually Bullish for Bonds
A hotter-than-expected inflation reading should have pushed Treasury yields higher, but this week's market action broke that conventional logic, with the correlation between bonds and equities showing a structural break.
Prashant Newnaha, senior rates strategist at TD Securities, said, "Bonds rallying after a stronger-than-expected US CPI print is highly counterintuitive. The clearest interpretation is that the plunge in the AI sector is dragging down growth expectations, and bonds are thereby reassuming their role as a hedge against equity risk."
Damien Boey, portfolio strategist at Wilson Asset Management, also pointed out that "the correlation between bonds and equities is clearly breaking down. Normally, growth stocks perform well when bond yields fall, but last night it was the decline in growth stocks that drove safe-haven buying in bonds."
According to analysis by Bloomberg Markets Live strategist Mark Cranfield, this risk episode may differ from the situation in late July — the risk of an AI bubble bursting damages economic growth, and safe-haven bond buying may last longer. The macro logic behind this is that if AI capital expenditure slows, a hard braking in computing infrastructure buildout would deal a heavy blow to the supply chain while also lowering market expectations for demand for electricity, commodities and high-end hardware, ultimately weighing on growth expectations and the inflation premium — and, counterintuitively, benefiting bonds.
The Wall Street Bull Camp: Elevated Valuations and Credit Stress Provide a Basis for Entry
After yields climbed to multi-year highs, several Wall Street institutions began rediscovering the allocation value of US Treasuries, though each bullish case emphasizes different points.
Earlier this month, a team led by Goldman Sachs strategist William Marshall wrote in a report that long-end forward rates remain high relative to fair value in most major markets, and that cracks in credit markets, an improved investor positioning structure, and a decline in foreign central bank holdings of US Treasuries as the dollar strengthens all support expectations for a Treasury rebound. Goldman has raised its rating on bonds from neutral to overweight.
A team led by Citi strategist Jason Williams focused its bullish view on the short end, favoring 2-year to 3-year Treasuries, arguing that slower inflation and weakening wage growth make it unlikely the Fed will raise rates to the peak levels seen in 2023.
A team led by Morgan Stanley strategist Matthew Hornbach argued that unless nominal GDP is expected to compound at 5.7% annually over the next decade and core PCE stays above 2.5%, current Treasury yields already offer allocation value, but recommended waiting until after this month's policy meeting and the midterm elections before entering.
A team led by Mitsubishi UFJ strategist George Goncalves characterized Treasuries as having entered a "deep value zone" and identified the midterm elections as a potential catalyst.
It is worth noting that Goldman also raised its rating on equities to overweight on a three-month horizon, citing continued strong earnings growth and some valuation repair, and explicitly stated that it still overall prefers equities over bonds in both the near and medium term.
The Bear Camp: Rate-Hike Risk and Term Premium Remain Major Obstacles
Not all institutions have chosen to join the bullish camp. The reservations of Bank of America and Barclays point to two core risks currently facing US Treasuries.
A team led by Bank of America strategist Mark Cabana argued that if US data remains strong, the Fed will face a choice: raise rates or tolerate a surge in bond market rates.
Barclays strategists Anshul Pradhan and Demi Hu stressed that rising yields have already tightened financial conditions, and that the broad increase in volatility shows "the market is reassessing not only the near-term policy path but also the uncertainty around the long-run neutral rate," adding that "investors are being compensated for duration, but that compensation itself neither protects against further yield increases nor is it a mechanical signal to buy duration."
San Francisco Fed President Mary Daly also said further rate hikes may still be needed, but suggested no action is required at the October 27-28 meeting. Options market pricing likewise reflects high uncertainty — according to a UBS report, options-implied probabilities show that at least five hikes and fewer than two hikes by mid-2027 are roughly equally likely.
UBS: Yields Are Elevated, but It Is Too Early to Rush Into Adding Duration
Between these bull and bear views, UBS's position offers a relatively middle-ground reference framework.
A team led by UBS strategist Phoebe White noted in an October 9 report that medium-term Treasury yields are already about 40 basis points above fundamental fair value, and that it is medium-term bullish on falling yields and a bull steepening of the curve. UBS forecasts that the 10-year Treasury yield will gradually decline from its previous high of 5.24% to 4.80% by the end of 2026 and further to 4.45% by the end of 2027.
However, UBS also stressed that given persistently strong economic activity data and the upside threat to energy prices from geopolitical risk — coordinated strikes by Iran and the Houthis have pushed Brent crude back to $104 a barrel — it maintains a "tactically neutral" stance on duration and does not currently recommend hastily adding outright long exposure.
UBS instead recommends curve steepeners as an alternative strategy with a more favorable risk-reward profile, specifically a 1-year forward 10-year/30-year SOFR curve steepener, arguing that this trade offers better relative value and more attractive carry.
Supply Side Focused on November Refunding
On the supply side, the market is focused on the upcoming November refunding announcement.
UBS expects the US Treasury to begin increasing 2-year to 10-year note auction sizes starting in May 2027 while reducing 20-year and 30-year sizes, a structural adjustment that will continue to support steepening of the interest rate swap spread curve. A team led by BMO strategist Ian Lyngen also flagged market rumors that Treasury Secretary Bessent may reduce long-end Treasury auction sizes, and Citi holds the same expectation, believing this would provide relative support for long-end Treasuries.
This week's 10-year Treasury auction saw strong demand, pricing about 2 basis points below the pre-auction level, the largest "stop-through" since April 2025, indicating that end-investor demand remains resilient. But UBS pointed out that Treasury's ability to expand buybacks is constrained by a widening deficit — projected to remain above $2.1 trillion for years to come — which fundamentally limits the room to push down long-end yields through supply adjustments.
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