Wall Street got an unwelcome surprise on October 14...
The U.S. Bureau of Labor Statistics' 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 means the Federal Reserve is likely to hike interest rates again.
That's bad news for the companies racing to build out AI, as many of them are borrowing money to do so. Every rate hike increases the cost of new debt.
Investors, already nervous about AI spending, dumped AI stocks... The S&P 500 Index fell 1% on October 14.
That part is normal. The bond market's reaction wasn't. Government bonds rallied.
The tech-heavy Nasdaq 100 fell 5.5% that week. Meanwhile, the 10-year U.S. Treasury yield dropped by about 0.17 percentage points.
It was the biggest weekly slump for both the index and the benchmark government bond since the tariff panic of April 2025.
As we'll explain today, that odd pairing is flashing a signal worth acting on... especially if your portfolio leans heavily on AI.
Bonds are supposed to be the stable part of a portfolio...
When stocks fall, folks usually flee to the safety of U.S. government debt.
Lately, that hasn't happened. To see why, you need to know one thing about bonds... Their prices and yields move in opposite directions, like two ends of a seesaw.
When inflation runs hot, new bonds offer higher yields to make up for quickly rising prices. That pushes down the prices of older, lower-yield bonds.
Inflation hurts stocks, too. Higher rates raise companies' borrowing costs and discount future profits. 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.
Bond investors got burned again four years later. Yields rose faster from July 2026 through September 2026 than in any quarter since 1994. And earlier this month, the 10-year Treasury yield touched its highest level since early 2002.
That's why the recent bond rally stands out...
A hot inflation report should push yields higher. And for a few hours, it did. The 10-year yield jumped to 5.33% on October 14... It fell to around 5.1% the next day.
Investors had pinpointed a problem bigger than inflation: The AI boom is stalling.
Cloud-computing company CoreWeave (CRWV), for example, fills data centers with AI chips and rents that computing power to AI developers. It has borrowed heavily in order to build those campuses.
As we explained on October 16, CoreWeave's debt hit $51 billion this month. To cover its bills, it would have to become one of America's biggest earners.
Lenders are starting to doubt the company can do that. CoreWeave's bonds yield about 15%, roughly 3 times what the 10-year Treasury pays.
If the AI spending spree slows down, the economy slows down with it. That means we can expect cooler inflation down the road and, eventually, lower interest rates.
Those factors make today's Treasury yields look attractive, so investors have piled in.
The AI slump is pushing growth expectations lower, which is turning bonds back into a cushion for stocks – which tend to rise when stocks fall.
From 2022 onward, bonds have offered a paycheck that inflation keeps taking back...
Today, the 10-year U.S. Treasury pays more than 5%, which is higher than inflation's current pace. And it's finally rising when AI stocks fall.
At least one major money manager agrees...
BlackRock's research arm downgraded its U.S. stocks rating from "overweight" to "neutral" and upgraded its short-term Treasurys rating.
The split between stocks and bonds can still flip back. The next alarm would be a hot inflation report that sends stocks and Treasury prices down together – again.
Until then, if AI stocks make up a big chunk of your portfolio, it's time to add some Treasurys.
You'll collect a solid return while you wait... and have a cushion if the AI sell-off deepens.
Regards,
Joel Litman
October 26, 2026
