Global bond markets are signaling their biggest risk-off sentiment in more than a year, as mounting concerns over the rapid pace of debt-fueled spending on AI technology cause investors to seek out safe-haven assets. On Friday, spreads on dollar bonds of higher-rated Asian companies widened to their highest levels since last July, moving in tandem with credit markets more broadly. The move mirrors a jump in corporate bond yield premiums globally, which surged to their widest since May 2025, reaching up to 129 basis points, according to Bloomberg. Asian credit markets signaled weakness at Friday's open, with regional credit-default swaps widening about 1.5 basis points to 78 and China technology spreads 3 to 5 basis points wider, as reported by traders. China investment-grade spreads were indicated as much as 5 basis points wider, while India investment-grade and Korean credit spreads widened as much as 3 basis points. "Credit risk is now calling the shots, and Asia cannot hide from the storm," said Natixis senior economist Gary Ng, adding that "there is a clear US risk aversion in AI-related investment and other global factors that may keep interest rates elevated."
US Treasury bonds experienced their biggest single-day decline since March 10, 2023, with the 10-year Treasury yield falling more than 17 basis points to 4.972%, dropping below 5% for the first time since September 24. The 2-year Treasury yield plunged 17.49 basis points, while the 10-year yield tumbled 18.69 basis points, ranking as their 32nd- and 24th-largest daily declines, respectively, since March 2007. US Treasuries rallied for their best day in more than two years, rising on all levels, with a wave of buying in Treasury futures as traders rushed to unwind bearish bets and cover short positions. The rally came even as Brent crude jumped 4% to $113.17 a barrel, highlighting how concerns over the sustainability of AI-led investment are starting to weigh on broader economic expectations. The scale of Thursday's move was nearly three and a half times larger than the median fall in US 10-year yields during comparable sessions since March 2007, demonstrating the extraordinary nature of the AI-driven market reaction.
Markets have witnessed a dramatic shift in October, with AI sentiment now replacing crude oil as the primary driver of US markets. The 10-session correlation between AI-linked equities and US 10-year Treasury yields has surged to +0.88, while the once-strong positive relationship with Brent crude has collapsed to almost zero, indicating no meaningful correlation over the same period. Over the past five sessions, the correlation between AI-linked equities and the US Dollar Index has reached +0.97, with similarly strong positive relationships against US 2-year and 10-year yields at +0.88 and +0.91, respectively. The shift is also reflected in Fed interest rate expectations, with markets pricing more than 100 basis points of additional tightening through the end of 2027 falling to around 61 basis points, including a 22 basis point unwind on Thursday alone as AI trade concerns intensify. Thursday's Nasdaq 100 index slumped 3.08%, while the Nasdaq Volatility Index (VXN) surged 4.30 points to 28.72, as selling in technology stocks coincided with an enormous rally in US Treasury futures.
The technology sector experienced its most significant sell-off since July, with the Nasdaq Composite falling 2.6% to 26,008.86 and the S&P 500 dropping 1.2% to 7,663.43, marking its worst daily performance since July. The Dow Jones Industrial Average edged up 0.02% to 52,867.98, supported by gains outside technology. The sell-off intensified after Meta Platforms fell sharply following its quarterly results and plans to issue a new class of non-voting shares to help fund its AI expansion. The decline extended beyond the benchmark 10-year note, with the 30-year Treasury yield falling approximately 15 basis points to 5.286% and the two-year yield dropping 17.5 basis points to 4.648%. Treasuries also benefited from changing expectations for Federal Reserve policy, with the market-implied probability of a rate increase of at least 25 basis points at the Fed's October meeting falling to 7.2%, down from 27.7% a week earlier, according to CME FedWatch data cited by Reuters.
Despite the scale of Thursday's sell-off, the Nasdaq 100 contract remains just above support at 28,875, a level that has attracted bids on multiple occasions dating back to late August. The fleeting bounce heading into Thursday's rout now appears to have been little more than a dead cat bounce, with the recovery stopped in its tracks at the 50-day moving average. Given the abruptness and intensity of the latest selling, the path of least resistance still appears to favour the downside, particularly heading into next week's major earnings releases from other AI hyperscalers. Below 28,875, the next level to watch is 28,400, which has repeatedly acted as both support and resistance. A break beneath the 200-day moving average at 27,889 would bolster the case for a broader trend change, bringing the July swing low at 27,060 into focus, followed by 26,258, a major level that previously acted as resistance in late 2025 and early 2026. The oscillators continue to favour shorts over longs, with RSI (14) moving back towards the low seen earlier this month, although it is not yet oversold.
Against the backdrop of mounting credit risks, market experts are recommending strategic portfolio adjustments. "I see this as the beginning of a more sustained repricing of credit risk," said Lakshmanan R, head of South and Southeast Asia corporates at CreditSights in Singapore. "It is the culmination of multiple global risks hitting markets one after another." Lakshmanan favours higher cash allocations and money-market instruments, as well as bank and financial-sector senior debt. Within credit, he prefers investment-grade over high-yield bets, reflecting the current risk environment. A $26 billion auction of 5-year US Treasury Inflation-Protected Securities (TIPS) was awarded at a 2.667% yield, with non-dealer bidding of 94.5% above the 90.8% average for the past six auctions, according to The Economic Times. The strong auction performance reflects growing investor confidence in Treasuries despite recent market volatility.
