AI Trade Turmoil Triggers U.S. Treasury Short Covering, Safe-Haven Function Briefly Revives
nashnova research
Last week the 10-year Treasury yield dropped roughly 17 basis points while the Nasdaq 100 fell 5.5% — a rare stocks-down-bonds-up pairing that hints Treasuries may be reclaiming their hedge role, though sticky inflation and lingering Fed hike expectations cloud how far the rally can run.
Why did Treasuries suddenly act like a safe haven again?
The Nasdaq 100 fell 5.5% last week while 10-year yields dropped about 17 bp — the classic signal that government bonds are hedging equity risk.
The last time this pairing appeared was during the April 2025 tariff shock.
This means → the anomaly of recent months — stocks falling *and* bonds falling together — was at least temporarily broken.
How did AI become the catalyst for a bond rally?
The trigger was rising doubt about AI leaders: Anthropic showed signs of slowing revenue growth, and unsecured bonds of AI cloud provider CoreWeave dropped sharply.
In plain terms = the prior market logic ran "AI is booming → companies issue massive debt to fund it → that crowds out Treasury buyers → Treasuries fall." Once AI itself cracked, the crowding-out chain loosened.
Julius Baer strategist Afonso Borges argued an AI-led downturn would resemble a traditional negative demand shock — a scenario in which medium-term Treasuries should again work as a portfolio hedge.
How much of the rally was just short-covering?
Before the move, CTAs — trend-following commodity trading advisors — held extremely short Treasury futures positions.
When equities sold off, shorts were forced into large-scale covering, amplifying the bond rally.
This reflects a key nuance: the rally was not purely "haven buying." A significant portion was position squeeze — the shorts were too crowded, and unwinding alone generated the price move.
What does a slowdown in AI bond issuance mean for Treasuries?
Investment-grade corporates have issued roughly $1.7 trillion in bonds this year, up about 29% year-on-year, led by big tech.
Natixis rates strategist John Briggs's logic: if investors see their existing AI-linked bonds losing value, appetite for new issuance drops.
This means → the crowding-out pressure from AI-related supply eases in the short term, giving long-end Treasuries more room to attract buyers.
Can this haven trade last?
Last week's CPI came in above expectations, briefly pushing the implied probability of a Fed hike this month to roughly 50%.
Fed Chair Kevin Warsh offered no guidance on policy or the economic outlook at the IMF annual meeting — only a restatement of the price-stability mandate. Without an anchor, markets swing more violently.
Standard Chartered strategist Steven Barrow called the rally a "red herring," arguing that inflation risk and a structural rotation from sovereign bonds into equities remain the dominant trends.
What did Friday's oil spike reveal?
Crude prices surged Friday on Iran war tensions and doubts over a deal for Trump to channel Russian diesel into global markets.
The result: Treasuries and equities fell in tandem — the haven logic broke down instantly.
In plain terms = when inflation pressure comes from the supply side (e.g. an oil shock), Treasuries do not hedge — they sell off alongside stocks. The haven role only holds in demand-driven downturns.
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