Treasuries are becoming attractive again as AI credit risk restores their safe-haven role, but persistent inflation, Fed policy, and massive government borrowing mean this may be an opportunity to gradually build exposure rather than aggressively bet on falling yields.
1. AI Credit Stress Is Restoring Treasuries' Safe-Haven Role
Despite hotter-than-expected U.S. inflation, the 10-year Treasury yield fell to around 5.08% as technology stocks sold off. Investors appear increasingly concerned that AI-related credit problems could weaken economic growth.
2. CoreWeave Has Become a Warning Sign for AI Financing
CoreWeave's 2032 bond yield surged above 15%, while its CDS widened sharply. The concern is shifting from expensive AI equity valuations to whether heavily financed AI infrastructure companies can generate sufficient returns to service their debt.
3. An AI Slowdown Could Actually Be Bullish for Treasuries
If AI capital spending slows, demand for data centers, power, commodities, semiconductors, and other infrastructure could weaken. That could reduce both economic growth and inflation expectations, supporting Treasury prices and pushing yields lower.
4. Wall Street Is Becoming More Positive on Treasuries
Goldman Sachs, Citi, Morgan Stanley, MUFG, and Wells Fargo see increasing value in Treasuries after the sharp rise in yields. Goldman has upgraded bonds to overweight, while Citi particularly favors 2 to 3-year Treasuries.
5. But Inflation and Further Fed Hikes Remain Major Risks
Bank of America and Barclays remain cautious. Persistent inflation, strong economic data, higher energy prices, and the possibility of additional Fed tightening could push yields higher again. High yields alone are therefore not necessarily a signal to aggressively buy duration.
6. UBS Sees Long-Term Value, But Says Don't Rush
UBS estimates Treasury yields are roughly 40 basis points above fundamental fair value and forecasts the 10-year yield falling toward 4.80% by end-2026 and 4.45% by end-2027. However, it remains tactically neutral on duration because inflation, energy prices, fiscal deficits, and Treasury supply remain significant risks.
At current yields, I think investors should seriously compare the attractiveness of the S&P 500 with U.S. Treasuries instead of automatically assuming equities offer the better risk-reward.
The S&P 500 still has strong long-term earnings potential, especially through AI and other structural growth themes. But valuations remain elevated, which means investors are paying a high price for future growth. By comparison, short-term Treasury bills and intermediate-term Treasury notes are offering yields above 4% to 5%, with much lower volatility and significantly less downside risk.
That does not mean I would replace equities with bonds. I still prefer equities for long-term capital appreciation. However, the opportunity cost of holding cash or Treasuries has changed dramatically. When a risk-free asset can generate an attractive return, the hurdle rate for buying expensive equities becomes much higher.
I also agree that duration needs to be managed carefully.
I would currently prefer short-term Treasury bills and intermediate-term Treasury notes over long-term bonds. Short-term bills provide attractive income with very limited duration risk, while intermediate maturities offer some upside if yields eventually decline. Long-duration bonds are more sensitive to inflation, fiscal deficits, Treasury supply, and changes in the term premium, so I do not think the additional duration risk is automatically worth taking.
For me, the best approach is not to make an all-or-nothing call between stocks and bonds. It is to use Treasuries as a portfolio tool. Short-term bills can provide stability and optionality, while intermediate-term notes can benefit if economic growth slows and yields gradually decline.
The key question is simple: If I can earn around 5% with very low risk, how much additional return am I being compensated to take equity risk?
In today's market, Treasury yields have raised the bar for equities. I still prefer stocks for long-term growth, but short and intermediate Treasuries have become too attractive to ignore.