Wall Street received unwanted news on October 14.

The government’s latest inflation report came in hotter than expected. Prices rose 3.7% over the past year, above the 3.6% economists had forecast.

Hot inflation raises the odds that the Federal Reserve will hike interest rates again. And that’s bad news for firms spending billions on AI infrastructure.

That’s because many of them are funding it with borrowed money. As a result, every rate hike makes the next dollar of debt more expensive.

Investors, already jittery about AI spending, dumped AI stocks. The S&P 500 fell 1% that day, dragged down by AI names.

Conversely, government bonds rallied. Over that week, the tech-heavy Nasdaq 100 fell 5.5%.

Meanwhile, the yield on the 10-year Treasury dropped by about 0.17 percentage points. For both, it was the biggest weekly drop since the tariff panic of April 2025.

For most of this cycle, owning both stocks and bonds have left investors nowhere to hide. Bonds are supposed to be the calm corner of a portfolio. When stocks fall, investors usually run to the safety of U.S. government debt.

To understand why that setup broke down, it’s important to know how bond prices and yields move.

A bond’s price and its yield move in opposite directions. When inflation runs hot, new bonds have to offer higher yields to make up for prices rising faster. That makes older, lower-paying bonds worth less, so their prices fall.

Inflation hurts stocks, too. Higher rates raise companies’ borrowing costs and shrink what future profits are worth today. So when inflation is the main worry, stocks and bonds sink together.

That’s what happened in 2022. The S&P 500 fell about 19%, and the broad U.S. bond market lost 13%, its worst year on record.

In 2026, bond investors got burned again. Yields rose faster from July through September than in any quarter since 1994. And earlier this month, the 10-year yield touched its highest level since early 2002.

That’s what makes this recent rally stand out.

A hot inflation report should push yields higher. For a few hours, it did. The 10-year yield jumped to 5.33% on October 14 then fell to around 5.1% the next day.

That meant investors had found a bigger worry than inflation: the AI boom—which runs on borrowed money—stalling out.

Take cloud-computing company CoreWeave (CRWV) for example.

The firm fills data centers with AI chips and rents that computing power to AI developers. To build them, it has borrowed heavily. Its debt hit $35 billion in late June, and it would have to become one of America’s biggest earners just to cover its bills.

Lenders are starting to doubt CoreWeave. Its bond yield is about 15%, nearly 3 times what the 10-year Treasury pays.

If the AI spending spree slows, the economy slows with it. Slower growth means cooler inflation down the road and, eventually, lower interest rates.

That makes today’s Treasury yields look attractive, so investors piled in. Prashant Newnaha, senior rates strategist at TD Securities, told Reuters the AI slump is pushing growth expectations lower, which is turning bonds back into a cushion for stocks.

For most of this cycle, bonds offered a paycheck that inflation kept taking back. Today, the 10-year Treasury pays more than 5%, above inflation’s current pace. And it’s finally moving opposite AI stocks when they fall.

Big money is moving the same way. Around the same time, the research arm of asset-management giant BlackRock (BLK) cut its view on U.S. stocks to neutral and upgraded Treasuries.

The split between stocks and bonds can still flip back. The signal to watch out for is a hot inflation report that sends stocks and Treasury prices down together again.

Until that happens, Treasuries offer a cushion for investors whose portfolios are primarily made up of AI stocks.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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