Bonds Could Hedge AI Losses as Treasury Correlation Turns Negative

The Goldman Sachs AI basket has lost 22% since early June, and its correlation with long-term Treasuries has gone negative, according to Fidelity's Jurrien Timmer — a shift that could give bonds a hedging function in the AI downturn.

If support around 357 gives way, investors with heavy AI exposure will be put to the test, although the protection offered by bonds has its limits. That cushion only functions when yields decline on worries about growth; it does not help when inflation drives yields up.

What Explains the Treasury Rally as AI Stocks Slumped?

The Goldman Sachs basket is made up of AI-related stocks, and its decline goes back to a selloff in chip names in early June, a session in which the Nasdaq Composite lost 4.2%.

Reuters said the downturn intensified on October 22, when the Nasdaq dropped 2.6% for its steepest single-day fall since early June. Meta Platforms (META) slid 7% after raising its capital expenditure outlook and announcing non-voting shares, and the Philadelphia Semiconductor Index declined 6.7%.

The GS AI basket is now sitting on support after a 22% drawdown since early June. That drawdown has led to a negative correlation between bonds and the AI/ex-AI pair. 🧵(1/2)

— Jurrien Timmer (@TimmerFidelity) October 27, 2026

Treasuries attracted inflows, and the 10-year yield slid from 5.13% to 4.96%, its first close under 5% since September 22, per Treasury curve data.

Using data through October 25, Fidelity calculates the 20-day correlation between AI and non-AI stocks and the Bloomberg long-term government bond index at negative 31%, which means the two move in opposite directions.

That reading is close to the negative 33% trough seen during the early-2025 Tariff Tantrum, as Timmer calls the tariff-driven decline. December 2025, however, saw negative 37%.

The 50-day correlation is negative relative to Treasuries as well, while the same pair continues to move in step with the S&P 500.

Will Bonds Keep Shielding Investors From AI Losses?

The bounce, however, appears unsteady. According to Reuters, semiconductor stocks gained 2.8% on October 26 after Anthropic submitted paperwork for an initial public offering, but the index is still 12.2% lower for the month.

The Federal Open Market Committee (FOMC) wraps a two-day meeting on October 28, with Personal Consumption Expenditures (PCE) inflation figures due the next day. 24/7 Wall St. said markets were pricing in about a 78% probability of a December rate hike as of October 22.

If the 10-year yield closes above 5.13%, the bond rally would be wiped out. Back in August, equities took a hit from bonds when 30-year yields climbed to their highest level in 19 years.

On October 22, the price of insuring Meta's debt also reached an all-time high, linking AI-related expenditure to the credit markets.