Could the cure for stocks wound the bond market?

Consider a strange notion. What if the same development that rescues Wall Street from yet another selloff turns out to be what pushes Treasury yields sharply higher? Yes, it may seem complicated, but stay with me.

Look at the past fortnight. Government bonds have attracted solid buying as investors hunt a safe place amid worries about AI outlays, credit dangers and, more recently, the political consequences of the US midterms. The 10-year yield has retreated to around 4.90% and has remained near that level.

Now, though, a Democratic sweep seems to be taking shape, and attention returns to technology shares. The campaigns against AI and data centres, which helped shape the midterms, have now emerged as one of the election's central messages. On the surface, that seems like bad news for tech, doesn't it? Slower infrastructure buildout would put the growth forecasts that investors count on at risk.

Even so, could some moderation be precisely what the AI trade requires?

For months, investors have asked whether large tech firms are investing too heavily and too soon; maybe a more cautious stance would be seen as a positive. In practical terms, that would mean smaller capital expenditure, and so less strain on financing and cash generation. More importantly, it might end the nagging concern over when the AI spending will begin to produce returns.

Naturally, the difference between budget discipline and harming future expansion is a narrow one. If investors ultimately recognise discipline rather than damage, stocks may get a modest lift from the election outcome.

If that happens, a return of risk appetite would reduce the safe-haven buying that has underpinned Treasuries amid the elevated AI-related credit dangers of recent weeks. That, in turn, could let yields turn back toward the inflation and fiscal worries that have prevailed for the better part of two months.

One caveat hangs over all of this: Trump's choice of how to proceed with the war against Iran.

Having taken a stinging loss at the midterms, Trump must confront the uncomfortable truth that the war will define his time in office. Will he look for a way out, or will he escalate instead to avoid seeming vulnerable after such a blow to his pride?

I would not rule out the second one, even though a less friendly Congress makes it harder.

With that in mind, further escalation could lift oil prices, reawaken inflation worries and push Treasury yields higher even as geopolitical uncertainty persists.

So in my view, the driving force behind the next move in Treasury yields will be either weakening safe-haven demand or a fresh wave of inflation anxiety. In any case, I would hesitate before betting that the bond market's recent advance has a lot of room left. The exception would be if Trump conceded and withdrew from the Middle East. Now that would be quite a turn.