NEWYORK
Bonds are functioning as a hedge against equity market volatility as institutional money rotates out of risk assets. The Nasdaq Composite fell 2.5 percent to 26,023, while the S&P 500 dropped 1.3 percent to 7,657, triggering a classic risk-off move into government debt.
The repricing centers on an "AI-driven growth scare"—market participants questioning whether artificial intelligence will deliver broad-based economic gains or merely concentrate profits in a handful of mega-cap tech firms. The fear is not deflation but disappointment: that rapid AI deployment fails to lift productivity or growth across the wider economy.
This dynamic reshapes the yield curve. Flight-to-quality demand pushes longer-dated Treasury yields lower more sharply than shorter tenors, compressing the curve and reflecting dimmed growth expectations. An investor holding 10-year bonds captures capital gains as yields fall—the classic inverse relationship between bond prices and yields that disappeared during aggressive Fed tightening.
Duration risk reverses from a liability into an asset. Long-end positioning, punished when central banks hiked rates, now benefits as terminal rate expectations fall. The shift restores bonds' correlation with equities to traditional risk-off patterns, a contrast to 2022-2023 when rising inflation rates whipsawed both asset classes simultaneously.
