A struggle over the pricing power of capital is unfolding across global markets. The AI super-capital expenditure cycle and the fiscal deficit cycles of governments around the world are simultaneously competing for funds in the bond market, triggering sharp turbulence in AI-related sectors while driving a long-absent safe-haven bid into US Treasuries. All of this points to one conclusion: the logic of the era of cheap capital is being rewritten.
This week, the Nasdaq 100 index posted its worst two-week performance since last April, a basket of AI-related stocks plunged 4.9% in a single week, and tech giants such as Meta suffered heavy losses.
At the same time, the US Treasury market staged a powerful reversal, with the 10-year Treasury yield falling below 5% for the first time in a month, long-duration bond ETFs rising for three consecutive weeks, and bond fund inflows reaching about $58 billion this month, accounting for 38% of all ETF inflows.
Capital voting with its feet reveals a deeper shift in market sentiment. The previously almost invincible Wall Street consensus — go long mega-cap tech stocks and short defensive assets — is now facing growing doubt. Jeffrey Blazek, co-chief investment officer for multi-asset at Neuberger Berman, put it bluntly:
This is a complete plot reversal — we are seeing money rush into Treasuries, diverging from the AI trade.
The AI spending narrative is wobbling, and cracks in market trust are appearing
Over the past two years, the AI trade has been perhaps the most unshakable consensus on Wall Street: go long mega-cap tech stocks and short defensive assets. That consensus met a real challenge this week.
Investors' anxiety is concentrated on one core question: can the enormous amounts of capital that tech giants are pouring into AI generate returns large enough, and soon enough, to match?
According to Wall Street CN, Anthropic may spend $750 billion on additional computing power over the coming years. Meta CEO Mark Zuckerberg then announced that the company would spend about $825 billion on future computing power and AI infrastructure leases and contracts.
After the news was announced, Meta shares fell more than 9% this week, the largest single-week drop since May, while the company's credit risk indicators simultaneously rose to historic highs. Debt protection costs for other hyperscale cloud providers and chipmakers also jumped.
At the same time, corporate bond credit spreads widened broadly around the world. The CDX investment-grade index, a key gauge of perceived risk in the US corporate bond market, rose as high as 64.4 in intraday trading on Friday, the highest intraday level since March. The higher the index, the deeper investors' concerns about credit risk.
It is worth noting that the AI-related stock basket and the 10-year Treasury yield have moved in the same direction for nine consecutive weeks, the longest such stretch since OpenAI launched ChatGPT.
This is completely different from the situation in July, when the AI trade cooled and Treasuries also came under pressure. The current setup means that weakening confidence in AI is being directly translated by the market into demand for safe assets.
Treasuries regain their safe-haven role, and the shift toward defense accelerates
The bond market reversal came fast. At the start of the week, a wave of investment-grade bond supply pushed the 10-year Treasury yield up to 5.14% on Monday; then AI panic hit, and the curve reversed sharply.
Treasuries surged across the board on Thursday by 12 to 18 basis points, with the belly of the curve leading the move in its best single-day performance in more than a year. The 10-year yield closed at 4.97%, falling below 5% on a closing basis for the first time in a month and dropping below its 50-day moving average for the first time since June.
Christian Gattellari of Goldman Sachs said, "We have now broken through all CTA short-term buy triggers," with trend followers' short positions reaching 87% of maximum short exposure. Charlie McElligott of Nomura told clients that bonds are once again "playing their hedging role."
Cameron Dawson, chief investment officer at NewEdge Wealth, offered this assessment:
As the previous stock market leadership groups turn more defensive and credit indices send stress signals, investors now have a reason to seek the relative safety of bonds.
Fund flow data also confirms this defensive shift. According to Baird Strategas, the gap between demand for equity and fixed-income ETFs has fallen to a historically low decile range.
Bloomberg data show that this month marked the second consecutive month in which fixed income attracted more than 35% of overall ETF flows, the first back-to-back occurrence since early last year. Athanasios Psarofagis, an analyst at Bloomberg Intelligence, said:
Bond inflows over the past two months have clearly been above normal, partly reflecting a more defensive asset allocation stance, but the appeal of yields is also prompting investors to lock in returns while they can.
AI and governments are competing for the same pool of capital
Behind the market turmoil, a more structural tension is taking shape: the AI super-capital expenditure cycle and the government fiscal deficit financing cycle are crowding into the same bond market at the same time.
According to Wall Street CN, companies need to build data centers, and governments need to cover deficits; the private sector must finance the purchase of computing power, while the public sector must finance welfare, interest and defense spending. Two huge waves of financing demand are surging in the same direction, and unless the supply of savings rises by an equal amount, the price of capital will have no choice but to rise.
This is not alarmism. Historically, the railway revolution ultimately transformed America, but 19th-century railway debt also triggered multiple financial crises; the internet ultimately reshaped the world, but the capital bubble around 2000 still burst. An industrial revolution that is correct over the long run and pressure in capital markets over the short and medium term are not mutually exclusive.
In the post-financial-crisis era, the operating logic of global capital markets was built on one core assumption: cheap capital would persist for a long time. The fiscal systems of governments, the expansion paths of technology companies and the valuation frameworks for asset prices all depended on that assumption. Now that assumption is wobbling.
Widening credit spreads are already an observable early signal. If spreads at the weakest credit tier (CCC) remain under pressure, it means capital tightening is no longer just a technical issue in the interest rate market, but is beginning to transmit to companies and assets with weaker financing capacity.
This week, refinancing concerns pushed CCC-rated bond yields to 15.85%, the highest level since 2020. But the yield gap with all junk bonds is currently 7.48 percentage points, still 1 percentage point below previous peaks reached in 2016 and 2020.
There is a fundamental difference between "AI has value" and "AI investment at any price is reasonable"; the same is true between "governments can issue debt" and "debt can expand indefinitely without cost."
When capital is forced to be rationed among different demands, the first to come under pressure are peripheral assets and weak credits, then the strain spreads to the broader capital market, and ultimately it transmits to employment, consumption and real investment.
The most profound change in this round of the bond market may not simply be that yields have risen to some specific level, but that the market is beginning to accept once again a fact that had been forgotten: money is not infinite.
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