Julius Baer: AI Sector Correction Could Restore U.S. Treasuries as Portfolio Hedge
Julius Baer research indicates that a sharp correction in the AI sector could trigger falling inflation, prompting U.S. Treasury bonds to resume their historical role as a portfolio hedge.
The artificial intelligence (AI) sector has driven global markets under the assumption that it is immune to interest rates and driven purely by internal innovation. However, recent market shifts signal a more dangerous scenario: interest rates are expected to become highly sensitive to AI sector fluctuations in the event of a market downturn.
A research report by Julius Baer concludes that a sharp correction in the technology and AI sector would act as a classic negative demand shock. A rapid withdrawal of capital expenditures by tech giants would directly weaken general business activity. Simultaneously, the expected hit to public equity wealth, tightening financial conditions, and a slowdown in hiring will significantly erode private consumption.
Impact on Infrastructure and Inflation
Beyond the direct hit to consumption, the massive reduction in investments in data centers and related computing infrastructure will quickly ease the demand for electricity, terminal equipment, and production inputs that have faced continuous shortages.
This chain reaction is expected to ultimately lead to a direct decrease in global inflation pressures—a macroeconomic scenario where government bonds have a long and proven history of providing protection and stabilization to investment portfolios.
The Bond Market Dilemma
Investor apprehension regarding bonds is understandable given recent history: today, the correlation between equal-weighted U.S. stocks and 10-year U.S. Treasury bonds is near its highest level in 30 years. Furthermore, the memory of the 2022 bear market remains fresh, when bonds failed to act as a hedge.
"Government bonds are expected to return to their traditional historical role, providing positive yields during sharp equity declines," noted Afonso Borges from Julius Baer's fixed income research department.
Therefore, the bank currently recommends that investors adopt an overweight position in medium-duration U.S. government bonds, viewing them as an essential and effective portfolio defense.
