The Zhitong Finance App learned that oil prices have risen in the past month, but what deviates from the 80% correlation that has existed until this year is the decline in US Treasury yields during the same period. What has changed? Jeffrey Rosenberg, senior portfolio manager of the Promised Alternatives ETF under BlackRock, the world's largest asset management company, recently said it was the decline of leading AI stocks — the Big Seven.
“Oil prices had this amazing correlation with Treasury yields before, but it stopped in October,” he said. “This tells us something important. In the mind of the market, geopolitical risk is secondary; AI risk is paramount.”
Divergence after an interest rate meeting
If one thing is stable in 2026, it is that US Treasury yields will rise as crude oil futures contracts rise. This rule came to an end in the past month. According to Jeffrey Rosenberg, who works at IALT (IALT) under BlackRock, the world's largest asset management company, the breakdown of this deal has had a significant impact on the market.
“Oil prices had this amazing correlation with Treasury yields before, but it stopped in October,” Rosenberg said.
The relationship between oil prices and bond yields also appeared at the FOMC press conference by Federal Reserve Chairman Kevin Warsh (Kevin Warsh) on Wednesday — Walsh pointed out that the continued rise in crude oil futures is a factor the central bank must consider when fighting inflation. But Rosenberg said what Walsh didn't talk about was “the most important conclusion.”
“There is an 80% correlation between US Treasury bonds and oil prices this year,” Rosenberg said, and this is “ridiculously high” compared to normal levels. “We've basically been trading with oil, and for good reason.”
What happened? Rosenberg said that a look at the depressing AI deal can be summed up. As the market moved away from this oil-bond trading correlation in October, “this tells us something important,” he said. “In the mind of the market, geopolitical risk is secondary; AI risk is paramount.”
Over the past month — this was most painful when Nasdaq plummeted on Friday, and earlier this week when Google recorded its biggest one-day decline in history and the market capitalization evaporated by around $500 billion — AI transactions experienced a round of retracement. Rosenberg said that the reason bond yields are falling is because the market equates the weakening of AI trading to a wider weakening of the US economy. He also said that last week's GDP report supported this judgment. “AI is everything, everywhere, all the time,” he said. The growth of the economy on the investment side and the wealth effect on the consumer side are all AI, he said.
“The third-quarter GDP figure was an explosion, and it's all related to AI,” Rosenberg said. He pointed out that increased investment in equipment, and consumption far exceeding expectations, are both driven by the AI wealth effect; the latter is particularly noteworthy considering that actual US income has been declining.
Corporate investment increased by 12.7% in the third quarter, the biggest increase in 2026 since 2011, excluding the pandemic. Among them, investment in information processing equipment led the 37% increase. Investment in industrial equipment increased by nearly 25%. Although it is not a direct AI transaction, it reflects data center spending to some extent.
Walsh did not agree with his judgment on the economy. At the FOMC press conference, he said, “It's easy to attribute all the strength of the economy to this wave of new technology. In fact, if you look at the data — really, the data from the last meeting to this time — the capital expenditure story is not just strong, it's not just strong, it's spreading. So if you want to tell a story about 'the strength we've seen is only in a few narrow fields', telling this story now is much harder than a few quarters ago,”
Indeed, market breadth — an indicator of how many stocks in the S&P 500 showed positive trading momentum — improved significantly in October, after it hit a 2026 low at the end of September, while defensive sectors such as healthcare and essential consumption strengthened. However, Rosenberg said that the overall conclusion of the October market was that any “fluctuation” in AI transactions will be viewed as a fluctuation in America's growth prospects, and it is anti-inflationary. And in an anti-inflationary environment, “only one thing can hedge,” he said, “that thing everyone wants to hate... the long end of the treasury bond curve.”
“This was a really important lesson in the market's performance last month,” he said.
Despite this view, Rosenberg remains wary of the statement that “this dynamic makes bonds the safe choice.” “The easiest answer is that this is not a return to normal—the norm used to be bonds hedging stocks,” he said.
The reason is that bonds face conflicting forces. The rise in oil prices and the continued rise in inflation above target levels will not disappear as challenges to the “effectiveness” of fixed income assets and fixed income as a hedging tool.
“Inflation is too high, which limits the ability of the Federal Reserve to provide easing, and we haven't gotten away from that,” he said. “But what we learned last month is that if it's big enough — if the AI trend shifts in a direction that's not favorable to macroeconomic and inflationary trends, it can bring about a complete change in this direction, forming anti-inflation, and bonds may react like October.”
However, he said investors should not bet that the deal is one-way or has no potential costs. Investors need to balance the trade-off between the potential diversification benefits of bonds, based on October's trend, and the scenario where AI is not disrupting the economy. And the longer the AI boom continues, compounded by America's broader fiscal challenges, “bonds will be under pressure,” he said.
How to trade the debt boom of AI hyperscale manufacturers
AI trading itself is a very large part of the bond market, which was evident in the past week — on the one hand, the decline after Google's earnings report, and Microsoft's return to the open bond market on the other. “This was a surprise to the market. It hasn't been back in almost ten years,” Rosenberg said.
As tech giants' capital expenditure requirements begin to exceed their free cash flow more frequently, the open bond market is undergoing an anticipated flood of issuance. “When the bond market and the open bond market look where all this supply comes from... it's a huge marginal issuer, and it's coming in more and more, over and over again,” he said.
Hyperscale vendors are approaching the maximum amount of financing the bank loan and private equity markets can provide; Rosenberg emphasized that the $40 trillion to $60 trillion global bond market can absorb an estimated $4 trillion of AI debt over the next four years, but “the capacity of the market is not limitless.”
This demand will lead to lower prices and widening interest spreads, even though the Microsoft deal attracted a large amount of investor interest and oversubscription.
Rosenberg said that it is a good thing that more debt from hyperscale manufacturers is being pushed to the open bond market because it means more transparency in the form of bond prices and CDS spreads. Microsoft's (MSFT.US) credit default swap (CDS) spread is currently trading at a level close to a five-year high, around 55; in contrast, it is very different from Oracle's (ORCL.US) CDS spread — the latter is close to 300. This provides another type of trading opportunity for investors: those who may not want to directly buy bonds due to America's inflationary environment and fiscal challenges, but still want to find a way to hedge against the AI boom.
“It's that old tool from the big financial crisis,” he said. “Shorten it. You can trade both ways in the open credit market, which you can't do with bank loans and private equity loans. But once they start entering the open market, you can do that.”
Rosenberg said that Google (GOOGL.US) fell 12% in a single day “not on the charts at all in history.” “So it's entering a different 'postal zone' — if you want to say that — a different range of market pricing, market fluctuations, and market indigestion. “This isn't the end of the world; it's just a different world during the AI construction period,” he said. More transparency in the open bond market makes investors more capable of trading “emotional fluctuations between fear and greed.”
Rosenberg believes that what the CDS market tells investors about large hyperscale manufacturers is not that the probability of default is high, but that as all of these companies try to obtain more debt financing, the ability of banks and financial intermediaries to find counterparties for these risks is becoming increasingly limited.
“Think financial markets and these massive investment frenzy. They don't run unidirectionally. They go up one level and then reset.” But as far as the AI boom is concerned, there is only “the positive part,” Rosenberg said. “It's still an extremely positive story, but you'll somewhat see a balance between a little bit and AI pessimism.”