The bond market's bizarre rally is a lot like truckers on I-95 in a downpour, searching for a rest stop. Everybody just wants a place to get off and park.
No one is happy buying Treasury bonds, given the relentless selloff over the past six months, which has added more than 130 basis points to the benchmark 10-year yield since the Iran war started in late February.
But sometimes it's about necessity. And Treasuries are looking pretty good right now.
The 10-year yield has tumbled 33 basis points since peaking at 5.33% Wednesday in the early minutes after September's hotter-than-expected inflation report. On Thursday, it stood at 5.1%.
The sharp move lower seems counterintuitive in light of all that's going on -- the fastest pace of price increases in five months, the fighting in the Middle East that has global oil prices firmly north of $100 a barrel, and bets on a Federal Reserve rate hike.
But the dash to Treasuries, and their safe-haven status, makes perfect sense if you're an investor sizing it up against weakness in the AI trade, which has taken blow after blow the past week.
"Ground zero was the AI buildout's balance sheet," said Jeff deGraaf, CEO and Renaissance Macro Research, although he noted the selling "looked like a targeted repricing of anyone who needs outside money, not a liquidation."
Chip stocks closed in bear market territory Wednesday after falling some 11.6% over the past seven days The PHLX semiconductor index is more than 21% south of its record high in June.
And neocloud provider CoreWeave is on track to lose a third of its market value Thursday, dogged by its double-digit bond yields and questions over the fate of its business model.
It now costs around $1.1 million to insure $10 million in CoreWeave bond against default, a level that implies around a 50% chance of credit event.
Adding fuel to the fire was a Gartner report that suggested more than $3.5 trillion worth of AI infrastructure spending "could be exposed to impairment" by the end of the decade.
AI data centers owners will need $8.5 trillion in revenue to cover capex and financing costs, the report said, and will probably only generate $3.6 trillion.
"By 2030, Gartner predicts that cost pressure and a lack of a differentiating business model will force over 80% of neocloud providers to cease independent operations," the report said.
AI start-up Anthropic's third-quarter revenue estimates, presented to investors as part of its IPOroadshow, also showed a notable slowdown in growth -- even if the three-month tally was an astounding $16.8 billion.
Together -- Coreweave, Anthropic, and the fallout -- sent investors running to the bond market. Not even inflation and the possibility of a Fed hike slowed them down.
But the bond market won't be the place to park for a long time -- just like a rest stop during a downpour. The rain will stop, and the truckers will get back on the road.
Inflation, war, interest rates -- those worries will all come back.
September's inflation report suggested more to come, based on the surprise jump in core prices, "precisely what the Fed has been trying to head off," according to TwentyFour Asset Management's Johnathan Owen.
Wholesale inflation also powered higher last month, with a headline reading of 6.3%, the hottest in nearly four years, and a core price tally of 5%. Both were well ahead of market forecasts and signal upticks ahead.
Not the kind of things that typically sustain bond market rally, particularly when deficits are topping $2 trillion a year, crude isn't coming down, and the Fed is being squeezed to increase borrowing costs.
"A Middle East deal after the midterm elections could push yields lower via lower oil prices, but the fundamental direction of travel for rates remains higher, especially with ongoing fiscal challenges and heavy Treasury issuance," said Torsten Sløk, chief economist at Apollo Global Management.
"The bottom line for both public and private markets is that higher for longer continues," he added.
Stocks are up just 2.6% over the past five months, largely held down by that surge in Treasury yields.
This week's yield reversal, however, hasn't lifted risk appetite. The S&P 500 is now up just 0.4% on the month and heading into a tricky path of tech earnings, a Fed rate decision, and the elections.
So keep an eye on the rest parking lot. When the truckers start moving their big rigs out again, get in line and follow them.
Comments