Good morning, I'm filling in for Spencer Jakab. Nvidia investors, still reeling from Jensen Huang's downfall, are looking to close the week on an upbeat note. Shares are notching gains in premarket trading, although the tumultuous past month has shredded nearly 30% of the chip giant's market value. Futures are pointing to a subdued open for major indexes. U.S. Treasurys are steadier a day after the 10-year yield moved decisively back above 5%.
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Weaving and bobbing
Artificial intelligence broke the Treasury market over the past month.
Rather than yields rising as the economy proved surprisingly strong, yields fell sharply from early October onward as the AI trade deflated. Investors virtually ignored upgraded growth in favor of concern about how to AI-proof their portfolio.
Economists might think this is just coincidence. They should look at the shares of (CoreWeave), the highly-indebted "neocloud" data-center operator at the bleeding edge of the AI boom. From Oct. 6, the day the tech-heavy Nasdaq index peaked, charts of 10-year yields and CoreWeave's shares are virtually identical; yields and the share price reaching a correlation of 83% over 10 days at one point.
It wasn't just that Treasurys were a safety play for those fleeing tumbling AI stocks. Treasurys also stopped responding normally to economic data during October, reconnecting only when the unexpectedly-high inflation figure came out this week.
Usually stronger-than-forecast growth pushes yields up as investors factor in higher Federal Reserve interest rates and demand for capital. Yet (Citigroup's) economic-surprise index hit its highest in three years, rising steadily through the month, with nary an impact on yields. The Atlanta Fed's GDPNow estimate puts fourth-quarter growth at an annualized 3.5%, far above start-October economic forecasts.
That AI stocks should be the inverse of Treasurys makes sense on two levels. The turn in sentiment reminded investors who had been ignoring Treasurys why they should hold some ballast in their portfolios. With juicy yields on offer, at least at the start of October, it was natural to switch from plunging AI shares into the safety of bonds.
Economically the link is understandable, too, since a weaker AI trade is a double whammy for growth. Between a quarter and half of economic growth is coming from a combination of AI capital expenditure and consumers feeling flush with gains from their Nasdaq stocks.
When investors turn against AI, it makes shareholders less well off, which usually leads them to spend less. That slows growth. Lower share prices-mirrored in weaker demand for AI-linked corporate bonds, too-might convince executives at AI firms to slow their gigantic investment plans. This again would be a headwind to growth.
Yet, the Treasury-AI stock-trading relationship only showed up once AI stocks started falling. Before October, there was no link between Treasurys and CoreWeave.
And this week's link really does look like coincidence. Treasury yields jumped back above 5% after the inflation numbers. Meanwhile, CoreWeave shares soared by more than a quarter after strong results, then gave back some gains after (Nvidia's) CEO resigned Thursday morning.
I like Treasurys as a way to protect against another AI crash. Barring that, I'd expect Treasurys to get back to their normal job of pricing interest-rate expectations, growth and inflation.