Nomura: AI growth panic replaces inflation narrative, US Treasuries regain hedging function

The traditional inverse correlation between U.S. Treasuries and tech stocks is reasserting itself in dramatic fashion.

Overnight, the 10-year Treasury yield plunged more than 15 basis points in a single day, briefly falling below the 5.00% mark to hit a one-month low; at the same time, the Nasdaq Composite tumbled 2.60%, and the Philadelphia Semiconductor Index fell as much as 6.72% in a single day.

Nomura cross-asset strategist Charlie McElligott noted in his latest report that the market is rapidly "repricing left-tail risk"—with the driver having shifted from the previous inflation narrative to a systemic revaluation of AI-driven growth prospects. This shift means that Treasury duration positions, which over the past six months or so left holders "losing on both ends," are once again functioning as a hedge for equity portfolios.

McElligott explicitly stated that this round of Treasury gains is no longer merely short covering, but rather the market beginning to characterize the AI sector selloff as a growth problem and positioning hedges accordingly. Rich Privorotsky, head of Goldman Sachs' Delta One business, holds the same view, saying: "Bonds have strengthened resolutely alongside the AI selloff... AI weakness has repriced the capex cycle and is increasingly morphing into a growth shock."

Market Turn: From Right-Tail Fear to Left-Tail Pricing

Just two weeks ago, McElligott was still describing an environment in which the market's only worry was "missing the rally." The title of his latest report has now become "Rapidly Repricing the Left Tail."

Just 48 hours earlier, he judged in another report that the brief Treasury short squeeze remained mechanical deleveraging and "does not yet constitute a narrative shift toward growth panic or recession expectations." But he also left a caveat: "We could very well reach the 'growth panic' point in the near term." As it turned out, "near term" meant about 48 hours.

Thursday's market structure confirmed this shift. The S&P 500 closed down 1.22%, ending a three-day winning streak; the Nasdaq fell 2.60%; the Dow Jones Industrial Average edged up 0.02%, and the Russell 2000 rose 0.11%. Sector divergence was stark: consumer staples, health care and utilities led gains, while semiconductors, memory chips and optical communications led declines—a classic defensive rotation.

Option Hedging Demand Suddenly Heats Up

McElligott noted that for weeks the market had seen almost exclusively demand for upside call options, a pattern that reversed on Thursday. Equity volatility, skew and the volatility of volatility (i.e., "tail demand") all rose sharply.

The change in the QQQ implied volatility curve was particularly notable: front-month implied volatility jumped about 3 points from the prior day's close to around 24, above the level at the end of February, whereas a month ago the front end was only in the 19-20 range. The relationship between Nasdaq spot and volatility also returned to textbook form: NDX fell, VXN rose, and the two once again fell on the standard regression line.

Hedging flows recorded by Nomura's trading desk that day included: 1,300 SPX January 5900-strike puts traded, 18,150 VIX November 25-strike calls traded, and 2,000 SPX December 7400-strike puts traded.

The importance of the $715 level in QQQ lies in this: once breached, market makers will enter negative gamma territory, and mechanical selling will become self-reinforcing. Nomura's estimates show that if the market falls another 1%, option market makers, leveraged ETFs and volatility-control funds combined would need to sell about $34 billion; a 3% drop would mean $134 billion; and a 5% drop would mean as much as $225 billion. On the upside, the same group would need to buy only $23.5 billion on a 1% rebound, and in a sharp rebound scenario, selling by volatility-control funds would even leave them as net sellers overall.

Treasuries Regain Hedging Properties, Rates Market Prices In Rate Cuts

In the rates market, the significance of this shift is even more profound. For most of 2026, the strategy of holding duration to hedge equity portfolios was almost a "lose-lose"—stocks and bonds falling together rendered the traditional 60/40 allocation logic ineffective. On Thursday, however, Treasury yields fell to a near one-month low, and McElligott noted that dollar interest rate volatility also rose with risk-aversion sentiment, "Treasuries are finally functioning as a hedge again."

U.S. Treasury option buying observed by Nomura included: nearly 50,000 TYZ 108.5-strike calls traded, a cumulative 35,000 FVH 106-strike calls traded, and 23,000 and 17,000 TYZ 107.5- and 107-strike calls traded, respectively.

The swaption volatility surface also corroborates this judgment: 1-month expiry, 1-year and 2-year tenors saw volatility jump 10.1 and 11.2 basis points in a single day, respectively, while 10-year and longer tenors barely moved. McElligott noted that when the short end of the volatility surface moves first, the market is pricing the Fed's next move—which, in a growth-panic scenario, means rising rate-cut expectations.

AI Narrative Revaluation: The Chain Reaction from Anthropic to Meta

McElligott attributed the root cause of this round of selling to a "rethinking of the AI trajectory," and laid out a detailed "indictment": Anthropic's annualized recurring revenue figures disappointed the market and raised questions about the viability of its IPO; Gartner warned that more than 80% of emerging cloud service providers will face bankruptcy; multiple AI ecosystem-related IPOs have met with a cold reception globally; Lam Research (LRCX) issued guidance that disappointed the market; and a widely spreading expectation of "capex growth flattening"—even though Meta maintained its aggressive capex plans and raised its guidance.

The Meta case is particularly noteworthy. McElligott described the current predicament of hyperscalers as "selling call options on themselves": in its 14C filing, Meta acknowledged that it needs to raise "hundreds of billions of dollars" starting this fall through the issuance of a new class of non-voting shares and a large amount of debt. This means hyperscalers are financing the AI arms race by selling their own upside to the public. The credit market is already pricing this risk: Meta's CDS spread widened from 80 basis points on July 29 to 120 basis points on October 22.

McElligott characterized this phenomenon as "non-linear" financing costs: when the world's most profitable AI spenders all need to pay more to borrow, the pressure on emerging cloud service providers downstream is multiplied—which also explains why emerging cloud service providers were the first link to collapse in this round of adjustment.

Growth Pillars Falter, Macro Narrative Faces Reassessment

McElligott noted that this round of selling has gone beyond a single crowded trade. The two S&P 500 sectors with the largest gains this year—technology and energy—are precisely the two legs of what he calls the "core constraint of the AI Cold War" barbell strategy, which has returned 60% year-to-date with a Sharpe ratio of 3. On Thursday, the energy sector fell 1.7% and the technology sector fell 2.9%, with both legs breaking at the same time.

The deeper impact lies at the macro level. McElligott believes that the trickle-down effect of AI capex, together with fiscal expansion by G10 governments, supported U.S. nominal GDP in maintaining an "overheated" range of 6% to 10% for most of this year, thereby forming an important foundation for corporate earnings growth expectations. Once this pillar falters, the earnings narrative, the economic overheating narrative and the "higher for longer" narrative will all come under pressure simultaneously.

McElligott wrote at the end of the report: "The previous assumption of a 'permanent capex trickle-down effect' no longer holds." The reflexive loop described by Goldman Sachs may provide some buffer—falling yields help ease the financing pressure on hyperscalers, thereby supporting the AI trade. But this logic itself means the market is pricing in lower AI growth expectations, and with market makers in negative gamma below QQQ $715 and a 5% decline corresponding to $225 billion in mechanical selling pressure, the market may not be far from a true stress test. Risk Disclosure and Disclaimer

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