AI sell-off triggers growth panic, Federal Reserve rate hike expectations postponed until January next year

The simultaneous triple pressures of a sell-off in AI tech stocks, the intensifying French sovereign debt crisis, and the Middle East oil price shock erupted together, leading to the most significant one-day rebound in the U.S. Treasury market in three years as risk-averse logic returned to dominance.

On Thursday, the 10-year U.S. Treasury yield fell 19.3 basis points in a single day to 4.952%, dropping back below 5%, marking the largest one-day decline since the March 2023 Silicon Valley Bank crisis. Data shows that such a magnitude of daily fluctuation has occurred on only 15 trading days over the past decade. At the same time, market expectations for a Fed rate hike were pushed back—Fed Funds futures are now fully pricing in a 25 basis point rate hike by January next year, whereas the previously expected timing was December.

The deeper signal behind this wave is that: as oil prices soar, U.S. Treasuries are being snapped up in tandem, meaning that the market interprets high oil prices as a growth threat rather than an inflation threat. Nomura cross-asset strategist Charlie McElligott wrote in a client report, "Bonds are resuming their hedging function," and "the market appears to be repricing in real time the probability of a U.S. 'growth scare' triggered by the AI reset."

The surge in U.S. Treasuries this round was triggered almost simultaneously by three distinct risk cues.

AI earnings season failing to meet implicit market expectations was the primary catalyst. Lam Research's results were strong but did not exceed the consensus ceiling; Tesla lowered its full-year capital expenditure guidance from over $25 billion to around $20 billion; Meta raised its full-year capital expenditure guidance lower bound to $135 billion, but this means that spend in Q4 alone would need to reach $49–59 billion, raising doubts about execution feasibility in the market. Barclays credit analyst Andrew Keches noted in a post-earnings report, Meta would henceforth rely on both the credit and equity markets, "the absolute scale of bond issuance may also rise," which will suppress its credit spreads for some time.

The French sovereign debt crisis intensified in parallel. Yields on France's 10-year government bonds rose intraday to 5.142%, the highest since June 2002; the France-Germany 10-year yield spread widened to over 170 basis points, the largest since the 2011 Eurozone debt crisis; France’s credit default swap spread broke through 100 basis points—the first time since 2012. France’s 10-year bond yields at one point exceeded Italy’s of the same term by about 50 basis points—an unprecedented occurrence in history. DWS Head of Americas Fixed Income George Catrambone stated that the turmoil in France "triggered a certain amount of safe-haven buying."

The Middle East situation also escalated. Houthi forces launched a drone attack on Saudi Aramco's Shaybah oil field, pushing Brent crude back above $112 per barrel, and WTI crude prices approached $100 per barrel. PGIM Credit Head of Global Bonds Robert Tipp said: "The escalation in the Middle East, the ongoing deterioration in France, and rising doubts in the AI sector—you’re seeing all these pressures erupting simultaneously. On a normal trading day, a significant move is just a few basis points. Today, you’re seeing three times that amount."

Goldman Sachs strategist Rich Privorotsky described this wave as "a striking reflexivity": AI weakness is repricing the capital expenditure cycle, easing the pressure on potential bond issuance and increasingly turning into a growth shock. "The problems affecting equities are helping to solve the interest rate issue."

The logical link is clear—the bond issuance scale of hyperscale cloud computing enterprises now rivals that of U.S. Treasuries; any retreat in AI capital expenditures essentially equates to reducing potential supply pressure on the bond market.

Meanwhile, credit default swap spreads for data centers surged again to historical highs, with overall credit risk for hyperscale cloud computing enterprises continuing to rise and spilling over into broader credit markets—the eurozone high-yield CDS index iTraxx Europe Crossover rose to 329 basis points, a nearly seven-month high.

Bloomberg macro strategist Michael Ball pointed out 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 continue to invest without resorting to the capital markets, rather than just who can throw the most money at it."

Mackenzie Investments chief fixed income strategist Dustin Reid said: "This level of volatility usually means some kind of panic or crisis is unfolding. We’re in a moment centered on the theme of AI overexpansion." This has triggered a rotation of funds from equities into U.S. Treasuries and the fixed income market.