Bonds once again have a license to hedge

NVIDIA

16/10/2026 12:36

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jon Sindreu
LONDON, Oct 16 (Reuters Breakingviews) - Something has changed in the bond market's mojo after months of being a punching bag for global investors. Thursday's bout of panic surrounding the economic feasibility of spending $700 billion a year in building out AI infrastructure had a bright spot: fixed income rallied powerfully. It suggests that expectations of central bank rate hikes have gone far enough to restore bonds' role as ballast in times of trouble.
Until Nvidia NVDA.O CEO Jensen Huang spoke at a Bloomberg event on Thursday, defusing concerns about neocloud provider CoreWeave CRWV.O, the tech-heavy Nasdaq 100 Index .NDX was having a bad day. Amid the AI selloff, investors switched over to buying US Treasuries, with 10-year yields edging down towards 5%, compared with 5.3% the prior week. Lower bond yields imply higher prices. The moves were mirrored by sovereign paper across the world, including in Germany and the United Kingdom.
This has re-established a dynamic that broke down recently, but which held for much of the 21st century: Bad economic news, sinking stock markets, usually steers central bankers to cut rates, which pushes up the value of bonds. The resulting inverse relationship, between equity and fixed-income prices, means the latter acts as a buffer for the former, forming the foundation of the famous 60-40 portfolio.
In recent years, this relationship stopped working, foiled by cascading energy shocks that pushed officials to raise borrowing costs regardless of the GDP impact. Following the start of the Iran war in February, for example, bonds and equities started to move in tandem. The correlation hovered around 60% in late September as Brent crude topped $100. This is poison for the 60-40 portfolio. Indeed, bonds have mostly moved against oil since the conflict began. However, this has all suddenly flipped around this month, with the old relationships springing back again.
Going by economic data, it's unclear why. With transit costs through the Strait of Hormuz still biting, traders rightly expect elevated energy prices to persist. Meanwhile, September inflation data in both the US and euro zone has come in much hotter than economists expected. And, while there is little sign of this spreading to non-energy prices and wages, this hasn't stopped central banks from raising rates. Derivatives contracts suggest that the Federal Reserve, the European Central Bank and the Bank of England will do so three more times over the next year.  
So what is going on? The likely explanation is that, despite Fed ratesetters recently coming up with hawkish speeches, most investors believe market expectations have gone too far, and that officials won't actually take borrowing costs above 4.5%. This would be only 75 basis points off the Fed's 2024 maximum rate, when inflation had previously peaked at 9.1%, versus 4.2% this time. Breakingviews spoke to a senior economist at a top global investment bank, who said he has yet to meet an investor who believes rates will rise so drastically.
Perhaps, after getting burned for months, some traders are simply insuring against worst-case scenarios. The flipside, though, is that bonds once again have room to appreciate if an offsetting shock, such as an AI bust, is seen hitting economic activity. After all, 5% yields inherently confer a lot of swagger.
     
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CONTEXT NEWS 
Shares in large technology companies sold off on October 15 as investors questioned the economics of the AI boom. Shares in CoreWeave, the heavily indebted data centre operator, tumbled and were down 28% relative to the start of the week at one point during the day. They later rebounded when Nvidia CEO Jensen Huang spoke at a Bloomberg event and touted CoreWeave’s financial strength. CoreWeave is a customer of Nvidia, which in turn holds an equity stake in it.
Meanwhile, global bonds rose in value. As of 0830 GMT on October 16, 10-year government-bond yields in the US, the United Kingdom and Germany traded at 5.0895%, 5.3689% and 3.42156%, respectively, compared with 5.2440%, 5.4457%, 3.4608% at the end of the previous week. Lower yields indicate a higher price.
On October 15, official data for the United States showed the producer-price index rising 1.3% in September. This compared with a 0.5% increase in August, marking the fastest monthly pace of wholesale inflation since March 2022. 

(Editing by Liam Proud; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on SINDREU/Jon.Sindreu@thomsonreuters.com))