AI investment frenzy ready for another surge? With the Fed rate hike decision settled, reverse buying appears as US Treasury bonds face their "most painful moment"

According to Zhitong Finance APP, amid the recent surge in long-term (10 years or more) sovereign bond yields driven by high oil prices, and the backdrop of the Federal Reserve implementing its first interest rate hike policy since 2023, the asset management division under Wall Street’s largest commercial bank giant JPMorgan Chase has returned to buy long-duration government bonds in the United States, Japan, and Australia.

With major global central banks including the Federal Reserve once again tightening monetary policy and fiscal deficits climbing, the term premium (risk compensation for holding long-term bonds) is on the rise. This combination is testing the trend of the 10-year US Treasury yield, known as the “anchor of global asset pricing,” and is also attracting contrarian capital inflows from Wall Street, which could significantly ease market fears of long bond sell-offs and surging yields.

If 10-year and longer-term US Treasury yields experience a “smooth top-out and retreat as in 2023,” this is very likely to indirectly drive global stock markets toward a bull market curve, fueled by the robust earnings growth trajectory under the AI computing power theme.

For the global bull market revolving around the AI computing power and AI application boom, the “anchor of global asset pricing” breaking above 5% is a major headwind on valuations and investment sentiment. If JPMorgan Chase leads a contrarian buy wave during the “pain point in the bond market,” thereby pulling down the yield curve, it would undoubtedly significantly reduce this headwind for the AI bull market.

In other words, if contrarian purchases from major Wall Street institutions such as JPMorgan Asset Management push long-term Treasury yields lower, while profit expectations for AI-related companies remain on a strong growth track and equity risk premiums do not rise significantly, this will help ease the rate-driven headwind on valuations and investment sentiment, thus supporting the continuation of the AI bull market. However, this does not mean the headwind has disappeared entirely, nor does it guarantee that stock markets will surge.

The asset management division’s Chief Investment Officer and Global Head of Fixed Income, Bob Michele, stated that his core view is not that “central banks are about to turn dovish,” but that the tightening actions from the European Central Bank, the Federal Reserve, and subsequently the Bank of Japan have the potential to rebuild anti-inflation credibility. This, in turn, could stabilize long-term yields by lowering long-term inflation expectations. If geopolitical tensions in the Middle East also stabilize, long-end yields could peak and then decline.

Acting at the “Most Painful Moment”! JPMorgan Buys Long-Term US Treasuries After Bond Market’s “Most Painful Period”

Bob Michele of JPMorgan Asset Management stated that his team has started buying long-duration government bonds from the US, Japan, and Australia, calling current prices “simply too cheap” and declaring that the bond market has reached its “most painful moment.”

“The dominoes are starting to fall,” Michele said in an interview with the media on Wednesday Eastern time. He pointed out that a series of central bank moves—from last week’s ECB rate hike, then the Federal Reserve, and possibly the Bank of Japan joining in on Friday—these rate hike cycles and restored anti-inflation credibility are now key drivers supporting the bond market. Another important factor is that as the US midterm elections approach, conditions in the Middle East may stabilize as well.

Bob Michele, JPMorgan Asset Management’s Chief Investment Officer and Global Head of Fixed Income, said that a perfect combination of tighter monetary policy and a calming of geopolitical tensions in the Middle East would signal that yields have peaked.

Recently, US Treasuries underwent a severe sell-off, pushing 10-year and 30-year yields to multi-year highs, even before the Federal Reserve’s first rate hike since 2023 on Wednesday local time. After the rate hike announcement, Michele stated that the long end sell-off was already overdone.

Michele noted that the long-term Treasury buyback plan initiated last month by US Treasury Secretary Scott Besant is an important stabilizing force; he also added that Besant “has enough ammunition to take further actions as long as he wants.”

He also warned that the rapid increase in long-end yields (10-years and above) “highlights the current market perception that the Federal Reserve has lost control,” and noted that this renewed rate hike should help policymakers at the Fed “reassert that they are still in control.”

The Oil Price Storm Drives Yields Higher, Contrarian Buying Surges under 5% US Treasury Yield—Is the AI Bull Market About to Restart?

Continued disruptions in Middle East energy transport and worsening threats to energy exports are important drivers behind this round of global long bond repricing. Houthi forces, after capturing the port of Mocha and Perim Island, further secured control over Greater and Lesser Hanish Islands, broadening threats to the Bab-el-Mandeb Strait and Red Sea shipping; Saudi Arabia continues to conduct airstrikes in Yemen, and the East-West pipeline, a bypass alternative to the Strait of Hormuz, has also been attacked and shut down.

On September 15, only four vessels were observed transiting the Strait of Hormuz, and crude loading at Yanbu Port was also suspended, further squeezing Saudi export routes. However, reports of increased supply via Oman have partly eased supply concerns: On September 16, Brent and WTI crude futures fell 2.7% and 3.2% respectively, settling at $105.83 and $102.43 per barrel. The energy shock remains, but what will cool off inflation trading is the actual restoration of transportation and supply, not just the strength or weakness of news on conflicts.

On September 16, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%–4.00%, marking its first hike since 2023. The previous day, the 10-year US Treasury yield touched 5.041% intraday, the highest since 2007; Japan’s 10-year government bond yield also reached a 30-year high of around 3.04%, with Japan’s 30-year bond already closing near a record high of 4.18% on September 1. Central banks’ renewed tightening and climbing term premiums are jointly testing the “anchor of global asset pricing,” also attracting contrarian capital. Against this backdrop, Bob Michele at JPMorgan Asset Management has started buying long-duration bonds in the US, Japan, and Australia.

From the nominal yield entry point for new money, the attractiveness of allocating to 10-year and longer US Treasuries near 5% has indeed increased, but “locking in cash flow” and “trading for yield declines” are two different logics.

For investors holding a single plain-vanilla fixed-rate bond to maturity, principal and interest are contractually paid. For example, buying a bond with a 5% coupon at par, you truly receive 5% of the original principal annually in interest; intermediate market yield increases do not reduce this coupon. However, the quoted 5% yield to maturity does not mean all tradable bonds have a 5% coupon.

For active managers, the appeal also includes potential capital gains as yields fall. Using first-order approximation of modified duration, if a portfolio has an 8-year duration and yields fall by 50 basis points, prices rise by about 4%; if yields rise by 50 basis points, prices fall by about 4%, not counting coupons, convexity, and other changes. A high initial yield offers better interest income conditions, but doesn’t eliminate risks such as market value fluctuation or inflation eroding purchasing power; thus, according to some strategists, while they acknowledge long bond value at current levels, they can’t assert that yields on 10-year and longer Treasuries have peaked.

Long-term nominal yields can generally be thought of as the average expected future short-term nominal rates plus the term premium. When central banks’ tightening boosts credibility that inflation will be contained, the market may require less compensation for distant rates and term risk even if the short-end rises now—the very mechanism enabling Michele’s contrarian trade to work. The fundamental driver for “rate hikes benefiting long bonds” is a repricing of future rate paths and term premiums, not the rate hike itself automatically suppressing long-term yields. Besant’s buyback plan can boost support by improving liquidity for old bonds, but Treasury buybacks are not equivalent to central bank quantitative easing and can’t alone ease fiscal financing pressure; the ultimate effect on market net duration supply depends on how new bond issuance is arranged.

For the AI investment wave driving the global equity bull market since 2023, the classic “AI bull market continued celebration feedback loop” of “long bond value emerges—yield pressure eases—AI computing power-driven index profits expand massively, opening broad valuation room” is a transmission chain that holds only under certain conditions.

Projecting from the pricing mechanism, if long-term yield declines are primarily due to restored energy supply, tempered inflation risk, and eased term premiums, while credit spreads remain stable and earnings expectations do not deteriorate, this will help ease pressure on equity discount rates and corporate financing costs. Conversely, if bond rallies mainly reflect recession fears, equities might suffer reductions in cash flow forecasts and higher risk premiums, not necessarily following bonds up. High yields are attracting contrarian long bond buyers, and if these buys are reinforced by cooling inflation risk, they could help extend the AI earnings-driven super bull market. Long bond stabilization is a potential catalyst, but realized earnings and valuation discipline ultimately determine how far a bull run can go.

In a research note released last weekend, Goldman Sachs provided a bullish logic for the extended US equity bull market since ChatGPT went viral globally in 2022, positing “earnings overwhelm everything”—they forecast the S&P 500 EPS to reach $340 in 2026, implying a sharp 24% YoY increase from a high base; in 2027, it’s seen rising further to $385, up 13% YoY.

Meanwhile, the forward price-earnings ratio has dropped from 22x at the start of the year to 19x now, indicating that rate headwinds have already been reflected via compressed valuations. Historical data show that the S&P 500 has declined by an average of 2% in the three months after each of seven previous rate hike cycles started, but gained 9% on average twelve months later. These data do not support the view that “the bull run must end once the Fed resumes hiking,” but cannot be used as 100% evidence that future investment returns will mirror history either. Goldman Sachs stresses in the report that the real question is whether realized earnings trends can offset further valuation compression.

Across the AI datacenter computing power infrastructure, the strong demand for compute resources driven by AI agents may rapidly spread to multiple segments—GPU/ASIC, HBM, server DRAM, enterprise SSD, high-speed optical interconnects within datacenters, as well as datacenter CPUs and power chains, etc. At the same time, the AI computing power industry already has verifiable profit support: Nvidia’s fiscal Q2 2027 datacenter revenue reached $89 billion, up 117% YoY; adjusted diluted EPS reached $2.22, up 120% YoY—demonstrating that growth is not merely a capex story but is now reflected in actual profits. Beyond the strong results of industry leaders, robust AI computing demand is also apparent in South Korea’s continued record semiconductor exports and long-term capacity agreements. According to South Korean Customs, between September 1–10, semiconductor exports reached $16.5 billion, surging 270% YoY, and in August, they hit $46.65 billion, up 209% YoY.

Another Wall Street giant, Jefferies, recently stated that driven by the AI investment boom and soaring AI-related corporate earnings, the S&P 500 is expected to rocket to 8,000 points by the end of 2026 and further to 9,000 points in 2027. Jefferies’ core logic is clear and compelling: In a cycle where AI-driven earnings growth exceeds the historical average by more than double, fighting the earnings trend is dangerous. Jefferies’ S&P 500 base target of 8,000 for 2026 assumes EPS at $373 (up 35% YoY, far above market consensus of 29%) and a 21.5x price-earnings ratio.