AI sell-off triggers growth fears, Fed rate hike expectations pushed back to January next year

On Thursday, the 10-year U.S. Treasury yield fell 19.3 basis points in a single day to 4.952%, returning below 5% and marking the largest single-day decline since the Silicon Valley Bank crisis in March 2023. Data shows that over the past decade, only 15 trading days have seen single-day moves of such magnitude. At the same time, market expectations for Federal Reserve rate hikes shifted later—federal funds rate futures now fully price in a 25 basis point hike by January next year, whereas the market had previously expected the timing to be December.

The deeper signal of this move is that as oil prices surged, Treasuries were simultaneously bought up, with the market interpreting high oil prices as a growth threat rather than an inflation threat. Nomura cross-asset strategist Charlie McElligott wrote in a client report that "bonds are reasserting their hedging function," and "the market appears to be repricing in real time the probability of a U.S. 'growth scare' brought about by the AI reset."

Three shocks simultaneously ignite the market

This round of sharp Treasury gains was triggered almost simultaneously by three independent risk threads.

The AI earnings season underperforming the market's implicit expectations was the primary trigger. Lam Research posted strong results but did not exceed the upper end of expectations; Tesla cut its full-year capital expenditure guidance from more than $25 billion to about $20 billion; although Meta raised the lower end of its full-year capital expenditure guidance to $135 billion, this means fourth-quarter spending alone would need to reach $49 billion to $59 billion, raising market doubts about execution feasibility. Barclays credit analyst Andrew Keches noted in a post-earnings report that Meta will in the future rely on both the credit market and the equity market, and "the absolute size of bond issuance could also rise," which would weigh on its credit spreads for some time.

The French sovereign debt crisis also intensified. The French 10-year government bond yield rose as high as 5.142% intraday, the highest intraday level since June 2002; the France-Germany 10-year spread widened to more than 170 basis points, the highest since the 2011 European debt crisis; French credit default swaps broke through 100 basis points for the first time since 2012. The French 10-year yield was at one point about 50 basis points higher than the Italian yield of the same maturity, a situation never seen in history. George Catrambone, head of Americas fixed income at DWS, said France's turmoil "brought in some safe-haven buying."

The Middle East situation also worsened. Houthi forces launched a drone attack on Saudi Aramco's Shaybah oil field, Brent crude rose back above $112 per barrel, and WTI crude approached $100 per barrel. Robert Tipp, global head of bonds at PGIM Credit, said: "Escalation in the Middle East, continued deterioration in France, and rising doubts in the AI space—what you are seeing is multiple pressures erupting at once. On a normal trading day, a decent move is just a few basis points. Today you are seeing three times that."

Goldman Sachs strategist Rich Privorotsky characterized this move as "remarkable reflexivity": AI weakness has repriced the capital expenditure cycle, eased pressure from potential bond issuance, and is increasingly evolving into a growth shock. "The problem affecting stocks is helping to solve the problem for rates."

Meanwhile, data center credit default swap spreads have surged back to record highs, and overall credit risk among hyperscale cloud computing companies continues to climb and spread to the broader credit market—the eurozone high-yield credit default swap index iTraxx Europe Crossover rose to 329 basis points, the highest in nearly seven months.

Bloomberg macro strategist Michael Ball noted that as financing costs rise, free cash flow will become a more important differentiator for tech stocks. The next phase of the AI trade "may be more about who can keep investing without reaching out to capital markets, rather than who can spend the most money."

Dustin Reid, chief fixed income strategist at Mackenzie Investments, said: "Volatility of this magnitude usually means some kind of panic or crisis is happening. We are in a theme centered on AI overexpansion." This triggered a rotation of funds from stocks into Treasuries and the fixed income market. Risk disclosure and disclaimer

Markets carry risk, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investment based on this is at the user's own risk.