AI trades stumble again as investors rediscover the safe-haven value of US Treasuries.

BlackRock, Inc.'s president said there is no bubble in artificial intelligence (AI). US Treasury Secretary Bessent also does not see any "systemic problem" in this boom. But no matter how hard Wall Street's top executives try to suppress market concerns about this area, the market refuses to calm down. The Nasdaq 100 Index posted its worst two-week performance since last April, while measures of credit risk and market turbulence both rose sharply. A basket of AI-related stocks plunged 4.9%, investors rushed into US Treasuries, pushing the 10-year Treasury yield below 5% for the first time in a month, and the safe-haven trade that had disappeared during the summer returned. Taken together, these market moves show that investors are increasingly doubting a trading logic that had been almost universally accepted on Wall Street: go long large technology stocks while shorting defensive markets that are under pressure from concerns that AI-related spending will reignite inflation. Although previous rounds of market volatility ultimately proved tolerable, this week's Treasury rally is, for Neuberger Berman's Jeffrey Blazek, evidence that a more significant shift may be underway in the market. Blazek - who is co-chief investment officer for multi-asset at the firm, which manages $630 billion - said: "This time it is coming on strong - we are seeing money flood into quality assets, performing in complete opposition to the AI trade, with investors buying US Treasuries as a haven. This is a complete plot twist." Neuberger's asset allocation committee began reducing equity risk exposure about a month ago, driven by concerns that the AI trade was overheated and that interest rates were rising. Market dynamics shift During the latest round of AI selling, Treasuries regained their safe-haven status, in contrast to the situation in July. Stocks fell this week, with the S&P 500 Index down 0.5%. The tech-heavy Nasdaq 100 Index fell 0.8% and is now 7.3% below the record high set earlier this month. Meanwhile, the largest ETF tracking long-term bonds rose for a third consecutive week, and the fund is on track for its best month since last February. This shift is also reflected in ETF flows. According to Baird Strategas data, the gap between demand for equities and fixed-income assets has fallen to the lowest 10% range in history, showing that investors increasingly prefer bond exposure. Most of investors' unease is concentrated on the enormous sums companies are borrowing and spending on AI, and on whether the technology can generate returns quickly enough to justify that spending. This week brought reports that Anthropic, one of the leading AI developers, may spend $750 billion on additional computing capacity in the coming years. Meta Platforms (META.US) said it will spend about $825 billion in the future on computing capacity and AI infrastructure leases and contracts. The company's shares fell more than 9% this week, the biggest weekly drop since May; after the plan was announced, a measure of the company's credit risk rose to a record high. Debt protection costs for other hyperscalers and chipmakers also rose sharply. At the same time, yield premiums on global corporate bonds continued to widen. A key risk gauge in the US corporate bond market - the CDX investment-grade index - rose as much as 1.5 basis points to 64.4 on Friday, the highest intraday level since March. The index rises when investors' concerns about credit risk intensify. As investors begin to pay more attention to AI's impact on the economy, a basket of AI stocks has moved in the same direction as the 10-year Treasury yield for nine consecutive weeks, the longest such synchronized run since OpenAI launched ChatGPT. This contrasts sharply with the market pattern in July, when the AI trade and Treasuries lost momentum at the same time. Cameron Dawson, chief investment officer at NewEdge Wealth, said: "As the stocks that had been leading the market begin to falter and rotation turns toward more defensive areas, while credit indices send stress signals, investors now have a reason to seek the relative safety of bonds." Yet even as the bond market keeps sending cautious signals, some prominent figures are still pushing back against concerns that the AI trade could pose a broader threat. According to the Financial Times, Bessent told investors at a closed-door meeting that he does not see systemic problems in the AI boom. BlackRock's Jon Gray conveyed a similar view, saying investors should not worry that the AI trade is turning into a bubble. JPMorgan strategists including Nikolaos Panigirtzoglou attributed the sharp selloff in AI stocks to so-called VaR shocks. The term refers to situations in which asset managers' risk models trigger forced selling. In their view, investors who built large positions during the relatively calm months recently are now being forced to unwind as volatility suddenly spikes. The team estimates that chipmakers account for about one-fifth of total risk capital in global equity markets. Panigirtzoglou and colleagues wrote in a report: "VaR shocks do not necessarily need fundamental factors as a trigger; they more often reflect position adjustments. Given the recent decline in semiconductor stocks, we suspect that the unresolved risk from previously excessive long exposure in semiconductors has largely been cleared." Still, the market's shift toward a defensive posture is showing up in the US ETF market, with demand for fixed-income funds rising. Data show that investors have poured about $58 billion into bond ETFs so far this month, accounting for about 38% of all ETF flows. This is already the second consecutive month in which fixed-income assets accounted for more than 35% of overall flows, and the first back-to-back occurrence since the start of last year. Strategist Athanasios Psarofagis said: "Over the past two months, bond inflows have clearly outperformed their usual share. Part of that may reflect investors' greater preference for defensive assets, but current yields are also attractive enough that investors may simply want to lock in some income ahead of time while they still can."