AI trading collapsed? The bond market "knocked out" the stock market.

```

Cracks in the bond market are turning into earthquakes in the stock market.

On July 13 local time, U.S. semiconductor stocks were “knocked down,” and the AI sector suffered a full-scale retreat. Following the nearly 9% brutal plunge of South Korea’s KOSPI index, the Nasdaq once again broke below its 50-day moving average and closed below it, making it the worst-performing major U.S. stock index that day.

The semiconductor sector was hit hard, and AI-related stocks were all sold off—neither the “issuers” (capital expenditure investors, such as cloud computing giants) nor the “receivers” (providers of computing power, such as chip companies) were spared, with the latter experiencing an even deeper decline.

Interestingly, Mag7 and the remaining 493 S&P stocks saw nearly identical declines that day—meaning this is not just a purely style rotation, but a broader contraction of sentiment.

That day, three main trading themes tightened simultaneously: U.S.-Iran tensions pushed up oil prices, hawkish statements from the Fed crushed the bond market, and debt worries tied to AI capital expenditures exploded in the semiconductor sector. The “brutality” of the bond market may be one of the genuinely core warning signals to watch.

The logical chain of AI trading is: Tech giants borrow money → spend on building data centers → drive demand for computing power → semiconductor and AI stocks rise. Now, the first link in this chain—the bond market’s capacity to absorb—is loosening. Brian Garrett, head of derivatives trading at Goldman Sachs, said bluntly this week: “My credit colleagues’ level of tension has, for the first time in years, surpassed my equity volatility colleagues... ‘brutality’ is being repeatedly mentioned at the credit trading desk, while S&P 500 volatility recently has been bouncing within just a 30 basis point range.”

Bond Market Alarm: AI Borrowing Frenzy Meets Absorption Limit

The issuance scale of AI-related bonds has already pushed the investment-grade bond market to the edge of indigestion.

According to the Wall Street Journal, Alphabet, Amazon, Meta, Oracle, Nvidia, and SpaceX—six massive computing companies—have together issued about $244 billion in bonds this year, more than double last year’s full-year $108 billion and over 14 times the $17 billion in 2024.

Goldman Sachs investment-grade bond trader Jeffrey Papai wrote in a report: "In the past month, AI-related bond issuance reached $75 billion (year-to-date $241 billion, past year $360 billion), already widening the spread of our AI bond basket by about 25 basis points."

More importantly, the market’s absorption threshold is falling rapidly. Papai pointed out: "Previously, it required more than $75 billion of supply to put pressure on the market. Now, just $25 billion is enough to force the market into a passive stance." In other words, the market is increasingly unable to withstand the same shock.

Morgan Stanley data shows that the overall leverage ratio of massive computing companies has soared from 0.9x in Q3 2025 to 1.8x now, doubling in just over two quarters—surpassing the entire energy industry’s leverage level, and still climbing at about 0.3x per quarter.

In terms of market share, Amazon, Meta, Google, Microsoft, and Oracle now account for 4% of the entire U.S. dollar investment-grade bond index. If measured by duration-weighted (DV01), six massive computing firms plus three major chip companies already account for 9% of the index—and this is even before chip financing really takes off.

Papai’s conclusion is straightforward: "From recent performance, the incremental absorption capacity from investors has already shrunk significantly."

Why does trouble in the bond market lead to trouble in stocks?

The logic is straightforward: AI capital expenditures are supported by debt, and debt relies on investors to pay the bill.

Papai admits that to let the market absorb the next round of supply, several prerequisites are needed: slower issuance pace, changed issuance structure (more diverse currencies and maturities), more share taken by private credit and banks, and bond prices falling further (wider spreads) to attract new buyers.

But he also points out the inherent contradiction in this path:

If a full-scale AI bond selloff unfolds, it will directly hit the stock market and could spread to the broader investment-grade market.

BofA Chief Investment Officer Michael Hartnett lists “AI capital expenditure reductions” as the largest tail risk, outlining a trigger path: bond vigilantes cut off liquidity for massive computing firms, forcing them to switch to equity financing and lay off employees—Meta, Microsoft, and Amazon have already laid off 13%, 10%, and 9%, respectively.

Apollo Chief Economist Torsten Slok warns:

AI is currently the only pillar supporting the economy and market, and when so many bets are placed on so few companies, if returns arrive later than expected, it's not just an industry issue—it could push the economy into recession and bring the S&P 500 into a correction.

Slok also notes that token prices continue to drop, and China’s models have surpassed U.S. counterparts in both usage share and token consumption in the world’s most-used models—further squeezing the free cash flow outlook of massive computing companies.

Can this round of narrative be “revived”?

This is not the first time the AI bond market has approached a critical point.

In early May 2026, the Financial Times reported that JPMorgan, Morgan Stanley, and SMBC were seeking ways to transfer data center-related debt risks to a broader investor base, as core buyers had become resistant to AI bond supply.

At that time, Goldman Sachs published its "Decoding Agent Economy" report about 48 hours after the article, predicting intelligent AI agents would greatly boost LLM profit margins. The narrative pivot quickly calmed the market, triggering a new, larger round of bond issuance—Amazon in March completed a $37 billion deal (the fourth largest corporate bond ever), then issued another $25 billion in July; SpaceX opened the market with a $25 billion deal shortly after its IPO.

Now, Goldman’s own credit trading desk shouting “brutality” means the supporting strength of this narrative is waning.

Papai wrote in his report:

Given spreads have adjusted and the issuance window is approaching the earnings blackout period, the AI bond complex may get a temporary breathing space in the short-term, but medium- to long-term, given supply outlook, is expected to underperform further. He recommends holding credit volatility positions to hedge against possible broader market “contamination.”

Beyond the Bond Market: Waller Rate Hike Warning + Oil Shock

The bond market stress that day also came from another direction.

Fed Governor Waller’s speech in New York directly pushed up rate hike expectations:

If core inflation data this week is again hot, the FOMC will need to consider tightening monetary policy soon.

No matter how you measure it, inflation is rising this year.

I am concerned about persistently high core inflation at this time.

The 2-year U.S. Treasury yield climbed 6 basis points in a day, 30-year up 3 basis points. The July rate hike probability surged to the highest since Walsh took office, nearing 50%.

BTIG’s Krinsky noted that the real 10-year yield has hit its highest since April 2025, rising from 2.11% at the end of June to 2.34%. He judges:

If real yields quickly break through 2.40%, it will be enough to inflict a broader shock on the stock market.

Oil prices added fuel to the fire. WTI surged nearly 9% that day, approaching $78, a new one-month high—commercial traffic in the Strait of Hormuz plummeted to just 3 crossings in 24 hours (vs. 57 at the June 24 rebound high). Oil’s rise lifted inflation expectations, further reinforcing the hawkish logic in bonds.

Where to go from here?

BTIG's Krinsky gives three scenarios and probabilities:

1. Rotation continues (40%): Funds continue to flow out of semiconductor/tech/AI and into other sectors
2. Rotation reverses (20%): Funds flow back into tech and out of recently strong sectors
3. Rotation stalls, full-scale selloff (40%): Correlations spike, market falls across the board, similar to late July 2024

Krinsky specifically noted that the probability of the third scenario “has risen significantly today”—due to the surge in real yields, overnight collapse of KOSPI, and July rate hike odds near 50%.

Risk Disclosure and DisclaimerThe market has risks; invest carefully. This article does not constitute personal investment advice, nor does it consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their particular circumstances. Those investing accordingly assume full responsibility. ```