The PHLX semiconductor index fell more than 11.4% last week, causing investors to seek safety in U.S. Treasury bonds. Ed Yardeni said, “The rout in the AI corporate bond market has triggered a flight to quality and safety.” Many now wonder if this rally will last through the year-end.
That slump was paired with a similar decline in 30-year yields, the paper’s biggest weekly decline since April 2025, and a smaller 7-basis-points decline in 2-year note yields, which remain largely rooted to bets on a Federal Reserve interest rate increase later this year.
The moves were largely tied to the selloff in tech and artificial-intelligence-related stocks, which saw the PHLX semiconductor index fall more than 11.4% last week, dragging the chip sector benchmark deeper into bear market territory and the broader Nasdaq Composite down 4.5%.
Worries over the fate of the AI trade, and the trillions in new debt being added to the balance sheet of the sector’s biggest players, has stoked a selloff in AI-related corporate bonds, as well.
The extra yield, or spread, that investors demand to hold lower-rated AI debt instead of risk-free Treasuries has surged past 360 basis points, according to data from Goldman Sachs, and trade some 110 basis points north of non AI-related issuers.
Those moves have driven investors into the safety of U.S. Treasury bonds, sparking the strongest overall rally since the markets “Liberation Day” chaos of 2025. They have raised big questions over the fate of yields into the end of the year, as inflation pressures, debt and deficit figures, and November’s midterm elections weigh on sentiment.
“The rout in the AI corporate bond market has triggered a flight to quality and safety that has stopped the rout in the U.S. Treasury bond market,” said Ed Yardeni, founder and president of Yardeni Research.
“This confirms our thesis that the recent rise in U.S. bond yields mostly reflects better-than-expected economic growth,” he added. “Tougher credit conditions in the AI corporate bond market should curb some of the AI excesses. However, we doubt this will trigger an economy-wide credit crunch or a recession.”
But not everyone is expecting the safe-haven draw of Treasuries will continue into the end of the year and beyond.
“We’re not convinced this is a structural move, and we’d be quite surprised if we were to break below 5% on the 10-year yield,” said Padhraic Garvey, regional head of Americas research at ING.
“The market will likely use this as a platform from which to rebuild higher yields over the weeks ahead, and into the midterms,” he added. “Especially with neither side voicing an intention to take action on the fiscal deficit.”
Foreign holdings of U.S. Treasuries, a key indicator of global demand, were holding firm into the end of the summer, according to the most recent data from the Treasury Department, and stood at around $9.33 trillion in August.
China’s purchases, however, fell by $27 billion to the lowest levels in 18 years, while Japan, the biggest holder outside of the U.S., saw its pile fall to the lowest since late 2024 as it sold Treasuries to defend the yen from its long summer slump.
Global energy prices, and the inflation pressures they’re likely to stoke over the coming months, are an expected headwind to the safe-haven rally as well, especially with Brent crude having jumped more than 10% since the start of the month and trading close to $109 a barrel heading into the winter fuel season.
Further pressure likely will come from the Fed’s policy meeting this month, which will have to address both quickening inflation and rising deficits alongside its assessment of a still solid labor market.
The CME Group’s FedWatch is pricing in a 15% chance of a rate move late this month, but sees the Fed lifting its benchmark rate to between 4% and 4.25% before the end of the year.
“The balance of probabilities suggests there is at least one more leg of long-end weakness still to play out that could take 10-year yields back into the 5.25% to 5.5% range,” said ING’s Garvey. “We think it could overshoot towards 5.5% and remain elevated for a number of months as bond market jitters persist and could quite easily extend into the first quarter of 2027.”