Fidelity Director of Global Macro Jurrien Timmer reported that the 20-day correlation between the Goldman Sachs AI basket and the Bloomberg long-term government bond index fell to negative 31%, signaling that U.S. Treasuries are functioning as a hedge against declining artificial intelligence equities. The Goldman Sachs AI basket has suffered a 22% drawdown since early June and is currently testing support around the 357 level.
AI Stocks Face Sharp Drawdown as Yields Fall
The drawdown in technology equities accelerated on October 22, when the Nasdaq Composite dropped 2.6% in its worst session since early June, following a prior single-session drop of 4.2%. Shares of Meta Platforms (META) fell 7% after lifting capital expenditure forecasts and unveiling non-voting shares, pushing the cost of insuring Meta's debt to a record high. Concurrently, the Philadelphia Semiconductor Index fell 6.7%, though chip stocks staged a 2.8% bounce on October 26 following news surrounding Anthropic's S-1 IPO filing. Despite that single-day gain, the chip index remains down 12.2% for the month.
As capital shifted into government debt, the 10-year Treasury yield fell to 4.96% from 5.13%, marking its first close below 5% since September 22. Timmer noted that the current negative 31% correlation approaches the negative 33% reading recorded during the early-2025 "Tariff Tantrum," though it remains above the negative 37% level observed in December 2025. The 50-day view also remains negative against Treasuries, while maintaining a positive correlation with the S&P 500.
Key Takeaways
- Goldman Sachs AI basket is down 22% from its June peak, holding near technical support at 357.
- 10-year Treasury yield fell to 4.96%, breaking below 5% for the first time since September 22.
- 20-day correlation between AI equities and long-term Treasuries dropped to negative 31%.
- Meta Platforms stock sank 7% amid rising debt insurance costs linked to Meta's surging AI capex.
Rate Expectations and Inflation Risk Test the Hedge
The fixed-income cushion faces critical upcoming catalysts as the Federal Open Market Committee (FOMC) ends its two-day policy meeting on October 28, followed by the release of Personal Consumption Expenditures (PCE) inflation data on October 29. On October 22, markets priced approximately a 78% probability of a December Federal Reserve rate hike. Analysts warn that a close in the 10-year yield above 5.13% would erase the bond rally, echoing August when 30-year yields reached a 19-year high and pushed equity markets lower.
Why It Matters
The shift to a negative correlation between Treasuries and AI equities offers institutional portfolios a vital diversification mechanism during tech sector liquidations. However, this protective buffer only functions when falling yields are driven by growth concerns rather than accelerating inflation. If upcoming PCE inflation figures or hawkish central bank decisions push Treasury yields back over 5.13%, the simultaneous selloff in both fixed income and technology assets could resume, aggravating broader market downside.
