Oil futures rose over the past month while treasury yields fell, ending a pattern that had held through 2026. BlackRock's Jeffrey Rosenberg links the split to the decline in leading AI stocks. He says markets now treat AI risk as bigger than geopolitical risk.
Oil futures rose over the past month while treasury yields declined, breaking a correlation that stood at 80% this year. Jeffrey Rosenberg, senior portfolio manager of the Systematic Alternatives ETF at BlackRock, attributes the shift to the decline in the leading AI stocks, the Mag 7.
Oil and yields split after the Fed meeting
Federal Reserve Chair Kevin Warsh raised the oil-bond relationship at Wednesday's FOMC press conference, noting that oil futures have continued to rise, a factor the central bank must consider in its fight against inflation. Rosenberg said Warsh did not address what he called the most important takeaway.
AI risk now outranks geopolitical risk
Rosenberg said the break tells investors where the market's worries lie. According to Rosenberg: "In the market’s mind, the geopolitical risk is secondary to AI risk."
Bond yields went lower, Rosenberg says, because the market equates weakness in the AI trade with broader weakness in the U.S. economy. He said last week's GDP report backed that thinking. CNBC reported that business investment rose 12.7% in Q3, the biggest increase outside the pandemic since 2011, led by a 37% rise in information processing equipment.
Warsh did not agree with that assessment. He said the capex story is broadening, which makes the case that strength is confined to narrow pockets harder to tell.
Bonds hedge, but not as they used to
In a disinflationary environment, Rosenberg said, there is only one thing that hedges: the long end of the treasury curve. Even so, he cautioned that this is not a return to normal, where bonds hedged stocks.
Oil price increases and inflation persistently above target remain challenges for fixed income, Rosenberg said. He added that the longer the AI boom persists, bonds will be challenged.
Hyperscaler debt tests the bond market
Microsoft's return to the public bond market surprised investors, Rosenberg said, since the company had not been back in close to a decade. He said a $40 trillion to $60 trillion global bond market can absorb an expected $4 trillion in AI debt over the next four years, though the market is not unlimited in capacity.
Spreads on Microsoft credit default swap contracts are near a five-year high, roughly 55, while Oracle's are closer to 300. According to Rosenberg, the swap market signals not a high prospect of default, but that banks and financial intermediaries are finding it harder to locate counter-parties for the risk.
Source: CNBC
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