U.S. Treasurys could regain their diversification value if an AI-led market correction deepens, say Julius Baer analysts in a note. While stock-bond correlations have risen, the bank says a sharper AI downturn would resemble a traditional negative demand shock, as weaker data-center investment, falling equity wealth and softer hiring weigh on consumption and business spending.

Historically, U.S. 10-year Treasurys delivered positive returns during equity drawdowns between 2000 and 2020, the bank notes. Julius Baer says recent correlation doesn't necessarily undermine Treasurys' hedging potential, and sees intermediate-duration U.S. government bonds as an effective portfolio hedge.