Deutsche Bank: Bond Bearishness Has Gone Too Far, AI Risks Are Underpriced
nashnova research
Deutsche Bank FX research head George Saravelos warns that fixed-income pessimism is overdone; concentration risk in the AI ecosystem is the most underpriced systemic threat — and if it materializes, it would trigger a massive flight into bonds.
What are investors afraid of?
After meeting US clients, Saravelos found a prevailing view: AI is pushing yields higher and is seen as a "significant driver."
Clients also believe the US Treasury has lost control of the long end, fueling speculation that Treasury may suspend 20-year bond issuance.
This means → investors are stacking AI anxiety on top of fiscal anxiety, creating a self-reinforcing bearish narrative.
Why has the pessimism gone too far?
Saravelos contrasts this year's narrative with last year's: in 2024, markets broadly believed AI was potentially deflationary, and Treasury's efforts to cap yields were seen as credible.
In just one year, both judgments have flipped — AI went from deflationary to inflationary driver; Treasury went from credible to out of control.
In plain terms = market sentiment is a pendulum — it swung to one extreme last year, then to the opposite this year. Both times it overshot.
What is the truly underpriced risk?
Saravelos is explicit: next year's biggest systemic risk is not French debt — it is something going wrong in the AI ecosystem — a safety incident, a failed IPO, or disappointing revenues.
This means → concentration in AI (a handful of companies propping up the entire narrative) makes the risk highly clustered. If one link breaks, the shock propagates across the market.
His core call: this tail risk is negative for the dollar and extremely positive for bonds, yet the market has barely priced it in.
Why are yields already so high?
US Treasury yields have risen to multi-decade highs, driven by three converging forces: the Iran war pushing energy prices and inflation expectations higher, AI infrastructure spending keeping the economy resilient, and mounting government debt-financing pressure.
Sustained bond-market stress has led markets to expect Treasury will tilt its borrowing structure toward shorter-dated debt, including aggressive proposals to cut or cancel 20-year issuance.
But strategists at firms like BNP Paribas remain skeptical about the effectiveness of such moves.
How serious is the French bond selloff?
Client views on French government bonds are "overwhelmingly bearish," but Saravelos believes some of the concern is exaggerated.
He acknowledges last week's sharp selloff caused severe market dislocation, and rebuilding confidence will take time.
This reflects a new variable: French debt stress is emerging as an unanticipated source of euro pressure this year.
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