Bond market’s big short bet gets wakeup call as AI trade wobbles

US Treasuries, once seen as safe havens, are showing signs of a resurgence as investors become wary of heavy bets on bonds due to artificial intelligence trade wobbling. Amid concerns over the outlook for AI firms and its broader economic impact, 10-year yields dropped 17 basis points last week while the Nasdaq 100 Index fell 5.5%. This marks the first time such a drop has occurred in the same week since the April 2025 tariff turmoil.

The bond rally came after months of Treasuries failing to provide their usual protection during stock struggles. Factors like high inflation, a robust economy, and extensive borrowing for AI development pushed 10-year yields up over the past seven months to their highest levels in over two decades.

Investors, heavily invested in bearish Treasuries, may face short-covering and risk in the bond market, despite ongoing inflation. James Athey, a portfolio manager, stated that rumors of Treasuries' demise are exaggerated. While AI investment has spurred economic growth and added to inflation, slowing revenue growth at firms like Anthropic and CoreWeave raises questions about cracks in this trade.

Afonso Borges, a fixed-income strategist, believes AI-led downturns could act as disinflation catalysts, suggesting an overweight duration stance in the intermediate area. However, corporate issuance to finance AI infrastructure has intensified competition for capital, presenting a new hurdle for Treasuries.

If AI investment prospects fade, this could reverse the forces working against Treasuries. Investment-grade companies, particularly tech giants, have sold about $1.7 trillion worth of bonds this year, a 29% increase from this time last year. As AI-linked bonds lose value, investors might be less inclined to buy new bonds, driving demand for longer-term Treasuries.