By Ankur Banerjee and Tom Westbrook
SINGAPORE, Oct 15 (Reuters) – A rude awakening over the debt-fuelled AI binge has sent investors rushing out of stocks and into government bonds, which now seem to be reclaiming their status as a safe haven and a hedge against equity and credit market wobbles.
For much of the year, bonds have offered little protection as inflationary pressure pushed borrowing costs to multi-decade highs, leaving investors warily looking to hedge funds and other assets as alternatives.
But on Wednesday, something strange happened: Treasuries and other government bonds rallied sharply, despite a hotter-than-expected US inflation report, which left chances of a US rate hike from the Federal Reserve this year on the table.
The bigger concern for investors now is whether massive AI spending will pay off soon enough, especially with inflation running hot, and how much longer companies will be able to continue to raise funds at current costs of capital.
Credit markets are also showing strain, with the cost of insuring some AI-exposed companies against default hitting records.
“The upside surprise in US CPI and the subsequent rally in bonds is highly counter-intuitive,” said Prashant Newnaha, senior rates strategist at TD Securities.
“The cleanest read through is that the slump in AI is repricing growth expectations down leading to bonds serving as a hedge for stocks,” he said.
On Thursday, the yield on the benchmark US 10-year Treasury note fell 8.4 basis points to 5.105%, hitting its lowest level in three weeks and easing away from the 24-year high it touched last week. [US/]
The benchmark 10-year JGB yield dropped 6.5 bps to 2.93%, the lowest since September 10. Futures for German bunds and French OATs were up 0.7% [JP/]
Wagers on a near-term move were also tempered after San Francisco Fed President Mary Daly said further hikes would probably be needed but signalled no need to act at the October 27-28 meeting.
AI TRADE UNWINDS
The question left for investors, who remain unsettled by high volatility for rates, is whether an asset that’s been dragged by soaring sovereign debt and hot inflation is capable of offering a cushion if equities start to take a bigger tumble.
Treasury yields posted their sharpest quarterly rise since 1994 in the July-September period.
“Bond-equity correlation is definitely fracturing,” said Damien Boey, portfolio strategist at Wilson Asset Management in Sydney. “Usually, growth stocks do well in particular when bond yields fall, but last night growth stocks doing badly drove a safe-haven bid for bonds and their yields lower.”
Earlier this week, BlackRock Investment Institute downgraded its view on US stocks to neutral, citing volatility around AI, and upgraded Treasuries, preferring short-term notes.
The rout has been building for days as investors get increasingly nervous about AI spending.
The selloff in global equities centred on AI stocks that have powered the markets to record highs in recent years. South Korea’s KOSPI, an epicentre of the AI boom, sank 8%, set for its seventh straight decline.
The Philadelphia SE Semiconductor Index dropped 4.3% on Wednesday, down for a sixth straight session, its longest losing streak since May 2025.
“Investors are separating AI companies with deep cash flows from those that need debt to build,” said Kenneth Goh, UOB Kay Hian’s director of private wealth management.
“Private credit is where it could spread next,” Goh said. “Listed lenders to tech and venture companies already trade at steep discounts to their asset values, and more cautious lenders can slow the AI build-out well before any defaults appear.”
Selling this week has been particularly intense in data centre operator CoreWeave, which has issued $22 billion of bonds and $26 billion of loans, according to LSEG data.
“Much of the spending is by companies borrowing to rent computing power to AI labs that don’t yet earn enough to cover the bill,” said Armina Rosenberg, portfolio manager at Minotaur Capital.
“When CoreWeave’s bonds yield 15%, investors are asking whether the end customers will make enough money to keep paying in three or four years,” she said.
(Reporting by Ankur Banerjee and Tom Westbrook in Singapore; Editing by Sam Holmes)
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