Why Bonds Are Selling Off and Gold Could Shine Again

Summary

Bonds have sold off significantly since the year began, driven not primarily by inflation fears, but by rising real yields. This trend is fueled by two key factors: the conflict in the Middle East, pushing oil prices higher, and the AI trade, which has surged following breakthroughs in AI models like Claude. The AI rally, in particular, has created a positive wealth effect, leading many in the bond market to believe the Federal Reserve can prioritize fighting inflation over growth concerns. The oil market faces potential price increases to one hundred fifty to one hundred sixty dollars per barrel due to declining inventories and disruptions in the Strait of Hormuz, especially if negotiations with Iran falter. Meanwhile, the AI trade, despite impressive gains, is showing signs of cooling. Large tech companies' capital expenditures related to AI have slowed, and some companies are hitting their 'token' budgets, suggesting a shift from experimental use to more constrained usage. Regulatory scrutiny on AI is also increasing, potentially impacting future growth. Given the crowded nature of the AI trade and potential headwinds for oil prices, the outlook for bonds is complex. While buying bonds outright may be premature, a 'steepener' strategy is becoming more appealing. Additionally, owning long-dated gold calls could be a smart move, as gold may regain its safe-haven status if the AI bubble bursts and investors seek traditional havens.