10-year Yield Plunges 17 Basis Points in One Week! AI Trading Turbulence Rekindles Safe-Haven Appeal of US Treasuries

Last week, as concerns about the prospects of leading AI companies intensified in the market, the yield on 10-year US Treasuries fell by about 17 basis points over the week, while the Nasdaq 100 Index plummeted 5.5% during the same period. The last time yields and the tech stock benchmark index experienced such a synchronized drop within the same week was back during the tariff crisis in April 2025.

In recent months, US Treasuries have almost lost their traditional hedging function during periods of stock market stress. Now, turbulence in AI trades is bringing a turnaround to this situation.

AI Cracks Emerge, Bond Market Logic Shifts

The core narrative behind the current bond market rally stems from the weakening of AI trades themselves.

Signs of slowing revenue growth at Anthropic and continued declines in bond prices of AI cloud provider CoreWeave have prompted the market to question whether the AI-driven boom that caused the bond market rout is now showing cracks.

Over the past few months, the AI investment craze pressured US Treasuries from two directions: on one hand, large-scale AI infrastructure construction boosted the economy and surging chip demand intensified inflationary pressures; on the other, companies rushed into the credit bond market to finance AI projects, competing with US Treasuries for capital. According to Bloomberg data, investment-grade corporate bond issuance has increased by about 29% year-on-year, with tech giants being the main issuers.

Julius Baer fixed income strategist Afonso Borges wrote in a report: "An economic downturn led by AI will be closer to the traditional sense of a negative demand shock," and could serve as a catalyst for falling inflation. He pointed out that under such scenarios, "medium-term US Treasuries should once again offer effective portfolio hedging." The firm therefore recommends an overweight position in mid-term duration, citing data that from 2000 to 2020, 10-year Treasuries consistently delivered positive returns during stock market pullbacks.

Natixis North America Head of Rates Strategy John Briggs explained this logic from the supply perspective: "If investors find the AI-related bonds they hold are depreciating, their willingness to buy new bonds will decline. In the short term, this reduces the impact of AI issuance on the market and results in more funds flowing toward long-term Treasuries, alleviating concerns about supply crowding out."

Short-Covering Amplifies the Rally

The current Treasury rally is not solely driven by risk aversion; positioning structure has also played a crucial role.

According to Bloomberg, last week's bond market rally was fueled by large-scale short covering by CTA (Commodity Trading Advisor) funds—which previously held extremely aggressive short positions in US Treasuries. The buying produced by short covering further amplified the decline in yields and significantly increased two-way risks in the bond market.

Marlborough Investment Management portfolio manager James Athey cited Mark Twain’s famous saying: "To paraphrase Mark Twain, reports of the death of US Treasuries have been greatly exaggerated."

Rate Hike Expectations Cool, but Divergence Remains

The influx of safe-haven funds has also partially offset the pressure on the bond market from inflation data.

Consumer price data released last week came in above expectations, temporarily pushing the probability of a Federal Reserve rate hike this month to around 50%. However, as equity market sell-offs intensified, this probability quickly retreated.

Fed Chair Warsh later appeared at the IMF annual meeting, but aside from reiterating the Fed’s commitment to price stability, made no comments on the direction of monetary policy or the economic outlook. The market currently still expects the Fed to hike rates once more this year and to tighten again in 2027.

Standard Bank G-10 Head of Strategy Steven Barrow characterized the recent bond rally as a "red herring"—meaning a misleading signal. He pointed to upcoming inflation risks and the structural trend of funds migrating from sovereign bonds to equities in the long term.

Last Friday’s oil price spike also highlighted risks: driven by the Iran war situation, soaring oil prices reignited inflation fears and led to simultaneous declines in both US Treasuries and US stocks—Trump’s efforts to promote a deal allowing Russian diesel into global markets were called into question, causing a sudden midday surge in crude prices.

The Long-Term Investor's Perspective

For short-term traders, the outlook is full of uncertainty.

State Street Investment Management Senior Fixed Income Strategist in Tokyo, Masahiko Loo, pointed out that Warsh's monetary policy style of not providing forward guidance—which is a core principle of his policy framework—makes the market more prone to large price fluctuations.

However, he also stated that for long-term investors, "the situation is different." "If there is a larger-scale AI-driven risk aversion event, US Treasuries are increasingly able to provide the hedging function that investors have been missing in recent years."