MW The bond market has been doing something strange despite a hot inflation report

By Vivien Lou Chen

The contagion effect from AI into the bond market has 'started getting real,' one portfolio manager says

Fears about AI's destructive power on the U.S. economy and labor market were being reflected in the Treasury market on Friday.

The benchmark 10-year Treasury yield fell below 4% as U.S. government debt rallied on Friday, leaving the rate on pace for its lowest level in four months despite an unexpectedly hot producer-price index report for January.

Ordinarily, yields should be spiking after a hot PPI print because of the prospect of stubborn inflation, but this wasn't the case on Friday. Instead, the $30 trillion bond market was moving on something else: Worries about the destructive impact of artificial intelligence on the U.S. economy. The 10-year yield BX:TMUBMUSD10Y dropped to as low as 3.96%, while the rate on the 30-year bond BX:TMUBMUSD30Y slipped to 4.63% and was also poised for a four-month low. Meanwhile, risk-off sentiment sent the Dow Jones Industrial Average DJIA tumbling by as much as 820.42 points to a session low of 48,678.78.

Read: Wholesale prices rise sharply and point to persistent inflation

A drop below 4% in the 10-year yield BX:TMUBMUSD10Y is significant because it signals that traders have shifted away from expectations for a growing, healthy economy and toward more worrisome scenarios. If the yield falls below 3.75%, the bond market would be essentially pricing in a "genuine growth scare," said portfolio manager Vincent Ahn at Wisdom Fixed Income Management in Plano, Texas.

Friday's bond-market moves are "screaming that job and growth fears are in the driver's seat. The catalyst is pretty obvious: It is the great AI scare, which jumped a firewall from being a tech-sector story to being a macro story," Ahn said in a phone interview. He noted that if the 10-year yield drops below 3.75% in a week, that would be a "disorderly move." Some possible outcomes include the current rotation in U.S. stocks becoming a "broader risk-off move out of equities altogether," and expectations for the Federal Reserve's next interest-rate cut being pulled forward to May or June, he added.

Ordinarily, lower bond yields are good for consumers, businesses and the U.S. government because they reduce overall borrowing costs. The weekly average rate on new 30-year fixed-mortgages, for instance, fell below 6% for the first time in more than three years as of Thursday, according to Freddie Mac. But if yields are falling because of worsening expectations for the economy or job market, things change because such a "flight-to-safety" trade would likely be accompanied by a downturn in stocks and other assets.

AI fears sit at the top of the list of worries that the bond market is considering right now. Other concerns include the uncertainties created by President Donald Trump's efforts to replace tariffs that were struck down by the Supreme Court a week ago; the failure of the U.S. and Iran to reach a deal during their latest round of nuclear talks; and stock-market volatility.

Jose Torres, an economist at Interactive Brokers, told MarketWatch that Treasurys were finding strong bids on Friday because of worries that a down year in technology names could weigh on consumer spending, along with the risk that softening enthusiasm over AI might hold back the U.S. economy's performance. Separately, a team at Goldman Sachs wrote in a note that AI's impact within the fixed-income market is not "straightforward," and that the transition to higher U.S. productivity growth may involve a substantial variation in interest rates.

Fears about AI's destructive power in the software industry have led to shares of companies like Salesforce (CRM), Intuit $(INTU)$, Workday (WDAY), and ServiceNow (NOW) getting crushed in January and this month - only for investors to reconsider this thesis in recent days. Over the past few weeks, the AI scare has spread from software companies to insurance brokers, wealth management and trucking companies.

Then came the release of a Feb. 22 paper co-authored by Citrini Research, which painted a dystopian future triggered by AI that includes a U.S. recession by the second quarter of 2027, a 2028 scenario in which the S&P 500 SPX might fall 38% from its October 2026 highs, and an unemployment rate that spikes above 10% two years from now. It received both widespread attention, as well as pushback.

See also: AI will lead to huge societal disruption, a market-roiling new paper says - but some researchers are skeptical

More: Why did AI 'science fiction' spur market panic? We asked a behavioral-finance expert to find out.

Will Compernolle, a strategist at FHN Financial in Chicago, said he thinks the decline in long-dated yields has more to do with prospects for lower economic growth under AI and less to do with potential job losses.

But much will depend on what the stock market does from here. If the 10-year yield drops to 3.8% or 3.85% while equities are falling, this would suggest that "expectations for economic growth over the next five or 10 years have simmered," Compernolle said in a phone interview. For now, he views the 10-year yield's drop to around 3.96% on Friday as simply a return to the range which prevailed between September and December of last year.

Ahn of Wisdom Fixed Income Management sees things a bit differently. He said that the bond market's "traditional recession playbook" is that the "economy gets sick" first, followed by job losses. Now, "the arrow of causality has flipped" on the view that "AI is killing the jobs first, and that's what's making the economy sick."

From the bond market's perspective, the current grind lower in yields didn't come out of nowhere, Ahn added. Yields have been heading lower for months due in part to expectations for lower interest rates under a new Fed chairman after May, he noted. Nonetheless, the contagion effect from AI into the bond market has been abrupt and "started getting real" within the past two weeks.

"The market went from asking, 'Which software companies will survive AI?' to 'How many jobs does AI eliminate?,'" the portfolio manager said. A "Goldilocks" narrative of strong U.S. growth, cooling inflation and a Fed that keeps interest rates unchanged requires the 10-year yield to "stay in a roughly 4% to 4.5% range. Below 4%, the market is telling you one leg of that stool is wobbling. Below 3.75%, it's telling you the stool is tipping over."

Joseph Adinolfi contributed.

-Vivien Lou Chen

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February 27, 2026 15:15 ET (20:15 GMT)

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