Bonds Could Become the Hedge Against AI Selloff as Correlation Turns Negative
The Goldman Sachs AI basket has fallen 22% since early June, with its correlation to long-term Treasuries turning negative, potentially making bonds a hedge against AI losses.
The Goldman Sachs AI basket has experienced a significant 22% drawdown since early June, with its correlation to long-term Treasuries turning negative, according to Fidelity's Jurrien Timmer. This shift suggests bonds could serve as a hedge against AI selloffs, though the protection has limitations depending on market conditions.
AI selloff intensifies
The AI stock decline began with an early-June chip selloff that cut the Nasdaq Composite 4.2% in one session. The slide deepened on October 22, when the Nasdaq fell 2.6%, its worst session since early June. Meta Platforms (META) lost 7% after increasing its capital spending forecast and introducing non-voting shares, while the Philadelphia Semiconductor Index dropped 6.7%.
The GS AI basket is now sitting on support after a 22% drawdown since early June. As the bottom panel below shows, that drawdown has led to a negative correlation between bonds and the AI/ex-AI pair.
Bond market response
Money has flowed into bonds, with the 10-year yield falling to 4.96% from 5.13%, marking its first close below 5% since September 22. Fidelity's chart shows a 20-day correlation between AI and non-AI stocks and the Bloomberg long-term government bond index at negative 31%, indicating the two move in opposite directions.
This negative correlation is near the negative 33% low of the early-2025 Tariff Tantrum, though December 2025 reached negative 37%. The 50-day view also shows negative correlation with Treasuries, while the pair remains positively correlated with the S&P 500.
Fragile recovery ahead
The rebound appears fragile, as chips rose 2.8% on October 26 after Anthropic filed to go public, yet the semiconductor index remains down 12.2% this month. The Federal Open Market Committee (FOMC) concludes its two-day meeting on October 28, with Personal Consumption Expenditures (PCE) inflation data following on October 29.
Markets priced about a 78% chance of a December rate hike on October 22. A 10-year Treasury yield close above 5.13% would erase the recent bond rally, as seen in August when bonds slammed stocks lower as 30-year yields reached a 19-year high. The cost of insuring Meta's debt also hit a record on October 22, linking AI spending to credit markets.
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