Treasuries regain their hedge as AI investment faces a reality check

Treasuries are regaining their hedging role because doubts about the debt-financed AI investment boom are shifting markets’ focus from inflation to growth and financial risks.

• The 10-year Treasury yield is around 5.10%, about 20 basis points below its early-October peak near 5.30%, despite September CPI rising 3.7% year over year and core CPI reaching 2.6%.
• September PPI rose 1.3% month over month, its largest monthly increase since March 2022, but yields subsequently fell as investors focused on weaker growth and tighter financial conditions.
• The Nasdaq 100 dropped 5.5% last week, CoreWeave bonds fell below 80 cents on the dollar, Elice shares declined 32% on their market debut, and Microsoft withdrew from anchoring Nscale’s planned UK data center after power-connection delays pushed the expected date into the 2030s.
• The market is increasingly questioning whether customers will pay enough to justify new data-center investment, while slowing token spending, higher real yields and tighter credit could constrain highly leveraged borrowers and related sectors.
• Schroders says the stress is not yet a broad credit crisis, but notes early weakness in CCC-rated debt and argues that slower AI investment could support Treasuries through weaker growth, less competing debt issuance and renewed safe-haven demand.

Takeaway: The rates outlook remains constructive because elevated yields offer carry and potential capital gains if growth, earnings or capital spending disappoint, although inflation, fiscal policy, the October 28 FOMC meeting and upcoming technology earnings could still push yields higher.