For much of 2026, oil futures and Treasury yields moved in lockstep, with an 80% correlation. But in October, that relationship broke down, signaling a shift in market priorities. Jeffrey Rosenberg, senior portfolio manager of BlackRock's Systematic Alternatives ETF, attributed this change to the decline in leading artificial intelligence stocks, collectively known as the Mag 7. "In the market's mind, the geopolitical risk is secondary to AI risk," Rosenberg said on CNBC's "ETF Edge."
The breakdown in the oil-Treasury correlation has significant implications. Oil prices continued to rise, a factor the Federal Reserve must consider in its inflation fight, but Treasury yields declined. Rosenberg noted that the market now views weakness in the AI trade as a broader economic slowdown, driving bond yields lower. This was evident in the Nasdaq's sharp decline and Google's historic single-day drop, which wiped out half a trillion dollars in value.
Rosenberg highlighted that the AI trade's retracement has disinflationary effects, making long-term Treasury bonds an attractive hedge. However, he cautioned that bonds are not a safe bet due to persistent inflation and the Fed's limited ability to provide accommodation. The AI boom has also led to a surge in corporate debt issuance, with tech giants like Microsoft returning to the public bond market after nearly a decade.
Federal Reserve Chair Kevin Warsh disagreed with Rosenberg's assessment, arguing that the economy's strength is not solely due to AI. Warsh pointed to broad-based capital expenditure growth, suggesting that the economy's resilience extends beyond narrow sectors. Despite this, Rosenberg maintained that any "wobble" in the AI trade would be seen as a wobble in the growth outlook, reinforcing the importance of bonds as a hedge in a disinflationary environment.