Equity markets and fixed income are sending a clear message: capital is rotating away from AI infrastructure bets and into the safety of government debt.
In this week's U.S. midterm elections, the Democratic Party swept Congress, triggering a sharp selloff in large-cap American technology stocks. Risk-aversion demand rose accordingly, and Treasury prices surged across the board on Thursday.
Thursday's rally pushed yields on Treasuries of all maturities down by as much as 12 basis points to their lowest levels since early September, with Treasury futures volume running about 40% above the 20-day average.
As safe-haven capital flooded into the government bond market, the Nasdaq 100 plunged 6.4% and the Philadelphia Semiconductor Index tumbled 12%.
In fact, the Treasury market last month posted its biggest gain in more than two years 鈥?investors lost confidence in the sustainability of artificial intelligence infrastructure capital spending and began rotating from stocks into bonds.
"The decline in chip stocks is essentially a continuation of the market digesting the judgment that the pace of capital spending may slow," said Anmol Sinha, fixed income investment director at Capital Group. "This is exactly what is driving the current market."
Rate Expectations Shift: Bets on a "Hold" Emerge
Beyond pure safe-haven buying, the prospect that fading enthusiasm for AI infrastructure investment could drag on U.S. economic growth has also lowered market expectations for Federal Reserve rate hikes in the coming months.
Markets worry that after the Democratic Party takes control of Congress with a larger-than-expected margin, it will impose constraints on the AI industry in January.
Although traders still lean toward Fed policymakers raising rates by 25 basis points at their final vote of the year on December 9, trades betting on a "hold" have already appeared in the short-term rate options market on Thursday. Bets on further Fed rate hikes next year were also trimmed on Thursday.
The Treasury options market shows strong demand for hedges adding yield. Notable trades include one betting that the 10-year Treasury yield 鈥?currently around 4.82% and down about 6 basis points on the day 鈥?can fall to 4.7% by the end of next week, and another option expiring November 20 targeting a yield decline to around 4.35%.
"In our view, today is a standard risk-off move," said Gregory Faranello, head of macro strategy at South Street Securities Holdings. "We won't chase duration at this level, but for now we respect the bond market's move relative to risk assets."
Tech Giants Still Competing with Treasuries for Capital
It is worth noting that market enthusiasm for large technology companies has not disappeared, and corporate bond issuance is competing with Treasuries for funds.
Apple Inc. on Thursday prepared to raise $7.5 billion in the corporate bond market through a seven-part offering with maturities ranging from 2 to 10 years, its largest debt sale since 2021.
Microsoft, Oracle and Meta Platforms recently sold a combined $50 billion in bonds.
Strategists commented: "In the post-midterm AI pullback, the winner will be Treasuries 鈥?we have already seen this today. Perhaps the best way to describe this market running too fast is: technology has charged straight to the productivity endgame, while the real economy is still waiting for electricians and power."
Oil Prices and the Labor Market Remain Variables
With Thursday's gains, Treasury yields have returned to levels last seen from late September to mid-October 鈥?a time when rising oil prices, expectations of strong U.S. economic growth and Fed rate hikes, combined with climbing debt levels, pushed yields to multi-year highs.
Oil price volatility continues to buffet the bond market. Oil prices have fallen about 15% over the past three days, with the market believing the election outcome could change the course of President Trump's war with Iran.
Before the U.S. stock market opened, Treasury yields briefly rebounded as oil prices bounced from two-month lows.
Since the war broke out in February, when the supply shock reignited U.S. inflation and prompted the Fed to raise rates in September, oil prices have largely dictated the direction of Treasury yields.
Weekly initial jobless claims data released the same day revealed the resilience of the U.S. labor market, while October employment data due Friday is expected to improve from September 鈥?when job gains fell short of expectations.
Cleveland Fed President Beth Hammack and Richmond Fed President Tom Barkin both publicly expressed support for higher rates. Hammack voted against the Fed's decision to hold rates steady last month, advocating for a hike.
"The yield selloff since September has left us plenty of room to buy back," said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments. He believes that if October employment data is weak, the 10-year yield could fall further to 4.7% or even lower 鈥?the level seen in August.
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