Everything changed for the oil, AI and bond trades over the past month

Key points

• BlackRock's Jeffrey Rosenberg says the oil-treasury yield correlation broke down in October as AI risk took priority.
• Rosenberg argues Q3 GDP strength was driven by AI-related investment and consumption.
• He warns bonds are not a safe hedge due to inflation and fiscal challenges.

The long-standing correlation between oil futures and Treasury yields broke down in October, according to Jeffrey Rosenberg, senior portfolio manager of the Systematic Alternatives ETF at BlackRock. Rosenberg said on CNBC's "ETF Edge" that the shift has significant implications for markets.

Rosenberg noted that oil and Treasury yields had an 80% correlation this year before the relationship stopped in October. He attributed the change to the deflated AI trade, saying the market now sees geopolitical risk as secondary to AI risk.

AI's role in the economy

Rosenberg pointed to the third-quarter GDP report as evidence that AI is driving both investment and consumption. He said business investment rose 12.7% in Q3, the largest increase outside the pandemic since 2011, led by a 37% rise in information processing equipment.

Federal Reserve Chair Kevin Warsh disagreed with Rosenberg's assessment at the FOMC press conference. Warsh said the capex story is broadening and it is harder to argue strength is only in narrow pockets.

Oil and treasury yields had this amazing correlation and in October it just stopped

— Jeffrey Rosenberg

Bond market implications

Rosenberg said any wobble in the AI trade is now seen as a wobble in the U.S. growth outlook and as disinflationary. In such an environment, he said, the long end of the Treasury curve is the only hedge.

However, he cautioned that bonds are not a return to normal hedging. He cited too much inflation limiting the Fed's ability to provide accommodation and said bonds will be challenged if the AI boom persists.