US government bonds are tentatively reasserting their safe-haven status in financial markets, investors and strategists say, paving the way for greater inflows into Treasuries as AI concerns whipsaw equity markets and encourage investors to rethink hedging strategies.
The traditional role that Treasuries play as a risk-off hedge came into question earlier this year after the Iran war fuelled inflation fears and triggered a brutal selloff in bonds. But there are signs that conventional market dynamics are returning, with bonds rallying during bouts of equity market turmoil in recent weeks.
In October, the relationship between the S&P 500 and Treasuries shifted from a 50% positive correlation to a 50% negative correlation, according to UBS analysis. A negative correlation means bonds will typically gain ground when stocks fall, and vice versa, as opposed to both asset classes moving in tandem.
Treasuries further underlined their hedging credentials during Thursday’s dramatic stock market slump when 10-year yields fell 5bp to 4.83%, the lowest level in nearly two months. That contrasted with the tech-heavy Nasdaq Composite, which plunged 5.5%, its largest daily drop since April 2025, amid mounting fears that the Democratic Party’s sweeping victory in Tuesday’s US midterm elections will slow the AI infrastructure buildout.
“This correlation shift will probably encourage investors to consider bonds within their portfolios again, as the level of yields is attractive and there are growing risks on the equity side,” said Emilie Tetard, cross-asset strategist at Natixis CIB. “Bonds have reacted as a traditional safe-haven asset, which is how they typically behave when markets reprice equity risk.”
Normal service resumes
Treasuries appeared to shed their safe-haven status following the outbreak of the US-Iran war in late February. Soaring energy prices stoked inflation fears and forced central banks across the globe to resume interest rate hiking cycles. The 10-year Treasury yield hit a peak of 5.31% at market close on October 5, its highest level since 2002, having traded closer to 4% before the war began.
However, inflation fears have started to ease in recent weeks, sparking a recovery in bond markets, and a sharp drop in energy prices has added to the momentum. Brent crude oil futures are now trading below US$100 a barrel, having hit a peak of US$118 as recently as October 30. The result has been a sharp reversal in the correlation between stocks and bonds, which has dropped to its most negative level for several years, according to UBS.
Now, instead of inflation, the predominant concern for investors is whether the AI boom will pay off in light of disappointing third-quarter results from AI heavyweights such as Alphabet and the prospect of a more hostile political backdrop in Washington.
“The AI worry is close to an ideal case for bonds,” said Violeta Todorova, senior research analyst at Leverage Shares. “With 10-year yields near 4.90%, bonds finally have room to rally when markets panic. For years, Treasuries were insurance that barely paid out. Now it does.”
Midterm boost
With Democrats set to control both chambers of Congress from January and Republicans the White House, there are other reasons why the midterm elections could boost the appeal of Treasuries. Analysts say that divided government tends to constrain spending.
More immediately, a Democrat-controlled Congress has raised hopes of a swifter resolution to the Iran war, helping to lower energy prices and ease inflationary pressures. Oil prices fell sharply on Wednesday after US vice-president JD Vance blamed the Iran conflict for the Republican Party’s midterm losses.
Many analysts retain a positive outlook on equity markets despite the week’s volatility. Todorova, for instance, characterised the moves as a “reset, not a crash”. At the same time, a growing number of voices also believe Treasuries have regained their place as a risk-off hedge.
“Bonds are becoming a safe haven again and therefore a good hedge within a multi-asset portfolio,” said Vincent Cassot, head of equity derivatives strategy at Societe Generale. “That doesn’t necessarily change our view for equities. We haven’t become more bearish on equities over the short or medium term, for example. It’s just interesting to note that bonds can now help you hedge your portfolio if you choose to do so.”
