Bonds May Offer Cushion During AI Stock Selloff

Artificial intelligence stocks have experienced a noticeable pullback recently. However, traditional government bonds might be stepping up to provide a safety net for investors holding concentrated tech positions.

According to Jurrien Timmer, Director of Global Macro at Fidelity, the Goldman Sachs AI basket has dropped 22% since early June. Interestingly, its relationship with long-term U.S. Treasuries has flipped into negative territory, meaning bonds and AI stocks are currently moving in opposite directions.

Understanding the Shift in Bond Market Correlation

When two assets have a negative correlation, one typically gains value when the other falls. This dynamic is why bonds are regaining attention as a potential portfolio cushion.

Fidelity chart data through October 25 reveals that the 20-day correlation between the AI versus non-AI stock pair and the Bloomberg long-term government bond index fell to negative 31%. For context, this is close to the negative 33% mark recorded during the early-2025 selloff that Timmer calls the Tariff Tantrum. Back in December 2025, that metric reached negative 37%.

The 50-day correlation view against Treasuries is also negative. Meanwhile, the AI stock pair continues to maintain a positive correlation with the broader S&P 500 index.

Inside the Recent AI Stock Pullback

The recent slide in technology shares began with an early-June chip selloff that dragged the Nasdaq Composite down by 4.2% in a single session. Pressure intensified again on October 22, when the Nasdaq dropped 2.6%, recording its worst single-day performance since early June, according to Reuters.

Several major market moves drove that October decline:

• Meta Platforms (META) fell 7% after raising its capital expenditure forecast and unveiling non-voting shares.
• The Philadelphia Semiconductor Index dropped 6.7% in the same session.
• The Goldman Sachs AI basket tested key technical support near the 357 level following its 22% drop since early June.

How Capital Shifted Into Government Treasuries

As investors reduced their risk exposure in tech, capital moved into government bonds. Treasury curve data showed the 10-year Treasury yield fell from 5.13% to 4.96%, marking its first close below the 5% mark since September 22.

Think of bonds as a shock absorber during market slowdowns. When investors worry about economic growth, bond prices generally rise as yields fall, helping offset equity losses.

The Limits of the Bond Cushion

While bonds can protect portfolios during growth scares, that protection has clear limits. If inflation concerns drive bond yields higher rather than lower, the hedging benefit breaks down.

For instance, back in August, rising yields actively pressured stocks lower after 30-year Treasury yields reached a 19-year high. Looking forward, if the 10-year yield closes back above 5.13%, the recent bond market rally would be entirely erased.

Credit markets are also reflecting tension. On October 22, the cost of insuring Meta's debt against default reached a record high, demonstrating how heavy AI infrastructure spending is directly affecting credit markets.

What to Watch Next in the Market

Semiconductor stocks saw a brief bounce of 2.8% on October 26 after AI firm Anthropic filed to go public. However, Reuters reported that the chip index remained down 12.2% for the month.

Investors are closely watching several upcoming economic catalysts:

• The Federal Open Market Committee (FOMC) concludes its two-day policy meeting on October 28.
• Personal Consumption Expenditures (PCE) inflation data will be released on October 29.
• Market expectations reported by 24/7 Wall St. on October 22 showed a 78% chance of a Federal Reserve rate hike in December.

Past performance of financial assets or market indices is not a reliable indicator of future results.