Treasuries are the biggest risk to markets, say managers

The number one enemy of global financial markets has changed addresses. It has moved from Silicon Valley to the U.S. Treasury bond market. A survey conducted between September 4 and 10 with 190 managers who collectively oversee about $512 billion in assets shows that the disorderly rise in Treasury yields has taken the place of the so-called "AI bubble" as the biggest perceived extreme risk by the market.

About 33% of respondents pointed to the escalation of yields as the main threat, up from 27% the previous month. Concerns about artificial intelligence, which led the ranking at 32%, fell to 28%. This inversion says a lot about the current moment: anxiety has shifted from stretched valuations in technology to something more structural, the cost of the safest money in the world.

Managers reduce exposure to stocks and increase cash

The practical reflection is already appearing in portfolios. The net allocation to stocks fell from 56% to 49% between August and September. The cash level rose from 3.5% to 3.9% of assets. Although the percentage is still below 4%, a historically associated level with buy signals, the movement shows increasing caution.

Those who follow the global financial market know that this combination of reducing stocks and increasing cash is not trivial. Institutional managers usually move portfolios incrementally. A swing of 7 percentage points in stock allocation in a single month signals that the discomfort is not rhetorical.

Short selling U.S. Treasury bonds appears as the second most popular operation among the managers surveyed, coming in behind only long positions in global semiconductor stocks. In other words, the market is simultaneously betting that yields will continue to rise and that the investment cycle in chips still has momentum.

What needs to happen for money to return to Treasuries

The net position of managers in Treasuries is 48% below the ideal weight, compared to 39% the previous month. This is the lowest exposure to U.S. bonds since May 2022, when the Federal Reserve began the most aggressive monetary tightening cycle in decades.

For 27% of respondents, money will only return to the bond market if yields reach a level considered truly attractive. The cited example is a yield of 6% on the 30-year bond, something not seen since before the 2008 crisis. Another 19% condition the rotation on a significant rise in the stock market, which would generate profits to be reallocated.

This data is revealing. It means that for almost half of the managers, the U.S. fixed income market still does not offer enough premium to compensate for volatility. As we explained in our analysis of the role of Treasuries in the markets, U.S. Treasury bonds serve as a global benchmark for risk pricing. When managers flee from them, the cascading effect reaches from stock markets to emerging markets.

Treasury buybacks generate skepticism among professionals

The U.S. Treasury announced long-term bond buyback operations, which began on September 9 and are expected to extend until November 4. The idea, in theory, is to relieve pressure on yields. But the market did not buy the thesis.

Of the managers surveyed, 46% expect that the buybacks will have no impact on yields. Another 26% believe that interest rates could rise even further, despite the intervention. Only a minority sees room for relief. The skepticism is understandable: the volume of new Treasury issuances remains high, and international demand for U.S. bonds has shown signs of fatigue.

For Brazilian investors, this scenario matters directly. Higher interest rates in the U.S. tend to strengthen the dollar, pressure emerging currencies, and reduce appetite for risk assets. As we discussed in our analysis of the impact of U.S. interest rates on Brazil, every 50 basis points increase in 10-year Treasuries historically translates into capital flight from markets like ours.

American elections add more uncertainty to the scenario

The political factor also weighs in. The expectation of a Democratic victory in the U.S. midterm elections rose from 23% to 31% between August and September. The prevailing reading is that a Democratic majority in the House and Senate would mean more fiscal spending, which would further pressure bond yields.

In this scenario, 45% of managers expect a combination of rising yields and falling stocks. It is the worst of worlds for traditional 60/40 portfolios, which rely on the negative correlation between fixed income and equity to function as protection.

The message from managers is clear: the risk is no longer concentrated in a sector narrative like AI. It is at the foundation of the global financial system, in the bonds that serve as the basis for pricing everything else. As long as yields continue to rise disorderly, cash will keep piling up, and caution will dictate the pace of the markets.

AI infrastructure remains protected, for now

A curious data point from the survey: only 14% of managers expect cuts in investments in AI infrastructure by large technology companies, the so-called hyperscalers, throughout this year. Although the "AI bubble" has lost its position as the biggest risk, the consensus is still that the investment cycle in data centers, chips, and language models remains strong.

This explains why long positions in semiconductors continue to be the most popular operation. The market differentiates the speculative narrative around AI from the real demand for infrastructure. One thing is Nvidia's valuation seeming stretched. Another, very different, is Microsoft, Google, and Amazon cutting their capex plans. For now, the second hypothesis seems distant.