10-Year Yield Plummets 17 Basis Points in a Week! AI Trading Turmoil Rekindles Safe-Haven Attributes of U.S. Treasuries

Last week, the 10-year yield dropped 17 basis points in a single week, marking the first such decline since the tariff storm in April 2025, coinciding with a drop in tech stocks.

Written by: Long Yue, Wall Street Insights

Last week, as market concerns about the prospects of leading AI companies intensified, the 10-year U.S. Treasury yield fell approximately 17 basis points, 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 decline in the same week was during the tariff storm in April 2025.

In recent months, U.S. Treasuries have nearly lost their traditional hedging function during periods of stock market pressure. Now, the turmoil in AI trading has brought a turning point to this situation.

Cracks in AI Emerge, Changing Debt Market Logic

The core narrative driving this round of debt market rebound comes from the loosening of AI trading itself.

Signs of slowing revenue growth at Anthropic and the continued decline in bond prices of AI cloud computing provider CoreWeave have led the market to question whether the AI boom that drove the significant drop in the debt market is showing cracks.

In recent months, the AI investment frenzy has suppressed U.S. Treasuries from two directions: on one hand, large-scale AI infrastructure construction has boosted the economy, and increased chip demand has intensified inflationary pressures; on the other hand, companies have flooded into the credit bond market to finance AI projects, competing for funds with U.S. Treasuries. According to Bloomberg data, the issuance of investment-grade corporate bonds has increased by about 29% compared to the same period last year, with tech giants being the main issuers.

Afonso Borges, a fixed income strategist at Julius Baer, wrote in a report: "An AI-led economic downturn will be closer to a traditional negative demand shock," and will serve as a catalyst for declining inflation. He pointed out that in such scenarios, "mid-term U.S. Treasuries should be able to once again play an effective portfolio hedging role." The bank thus recommends an overweight position on mid-term durations, citing data that shows 10-year U.S. Treasuries consistently recorded positive returns during stock market corrections from 2000 to 2020.

John Briggs, head of North American interest rate strategy at Natixis, explained this logic from a supply perspective: "If investors find that the AI-related bonds they hold are depreciating, their willingness to purchase new bonds will decrease. This reduces the short-term impact of AI issuances on the market, resulting in more funds flowing into long-end U.S. Treasuries and alleviating concerns about supply crowding out."

Short Covering Amplifies the Rally

This round of debt market rebound is not solely driven by safe-haven demand; the positioning structure also plays a significant role.

According to Bloomberg, last week’s rally in the debt market was boosted by a large-scale short covering by CTA (Commodity Trading Advisor) funds—these funds previously held exceptionally aggressive short positions in U.S. Treasuries. The buying pressure from short covering further amplified the downward movement of yields and significantly increased the bidirectional risk in the debt market.

James Athey, a portfolio manager at Marlborough Investment Management, quoted Mark Twain’s famous saying: "To paraphrase Mark Twain, the rumors of the death of U.S. Treasuries have been greatly exaggerated."

Rate Hike Expectations Cool, but Discrepancies Remain

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

Last week’s consumer price data exceeded expectations, briefly pushing the market’s probability expectation for a rate hike by the Federal Reserve this month to about 50%. However, as stock market sell-offs intensified, this probability quickly retreated.

Federal Reserve Chairman Warsh later appeared at the IMF annual meeting, but aside from reiterating the Fed’s commitment to achieving price stability, he did not comment on the direction of monetary policy or economic outlook. The market currently still expects the Fed to raise rates once more this year and to tighten again in 2027.

Steven Barrow, head of G-10 strategy at Standard Bank, characterized this round of debt market rebound as a "red herring"—a misleading signal. He pointed to the inflation risks ahead and the structural trend of funds migrating from sovereign bonds to equity assets over the long term.

The sharp rise in oil prices last Friday also indicated risks: driven by the war situation in Iran, oil prices surged, reigniting inflation concerns, and U.S. Treasuries and U.S. stocks weakened simultaneously—President Trump’s push for Russian diesel to enter the global market faced scrutiny, causing crude oil prices to suddenly spike around midday.

Long-Term Investors' Perspective

For short-term traders, the outlook is filled with uncertainty.

Masahiko Loo, a senior fixed income strategist at State Street Investment Management in Tokyo, pointed out that Warsh’s monetary policy style, which does not provide forward guidance—this is a core principle of his policy framework—makes the market more susceptible to significant price fluctuations.

However, he also stated that for long-term investors, "the situation is different." "If a larger-scale AI-driven risk-averse market emerges, U.S. Treasuries appear increasingly capable of providing the hedging function that investors have been missing for the past few years."