Bond Market Defies Inflation Surge as AI Anxiety Drives Unconventional Moves

The U.S. bond market delivered a sharp divergence from historical patterns on Friday, as Treasury yields declined even after the January CPI report revealed inflation at 3.8%—above the 3.6% forecast and the highest since June 2023. The 10-year Treasury note yield dropped to 4.21%, marking its first decline in three weeks, while the 30-year bond yield fell to 4.62%. This counterintuitive move signals a repositioning of risk assessments beyond near-term inflation data. Investors appear to be pricing in a new macroeconomic risk: the potential for artificial intelligence to accelerate structural economic shifts. Analysts point to a growing consensus that AI could displace millions of white-collar jobs, reduce labor market flexibility, and compress wage growth over the next decade. These concerns have prompted a re-evaluation of long-term growth prospects, leading to a flight to duration despite inflationary pressures. The 5-year Treasury yield rose slightly to 4.47%, indicating that short-term rate expectations remain anchored by Federal Reserve policy forecasts, but the widening gap between short- and long-term rates—now at 40 basis points—suggests that long-term inflation expectations are being reassessed. The 10-year breakeven inflation rate fell to 2.41%, its lowest level since October 2024, reflecting a belief that future inflation may be more contained than current headline figures suggest. Market participants across asset classes are adjusting: equity markets saw a modest rebound, with the S&P 500 rising 0.7%, while gold and tech stocks outperformed. The shift underscores a pivotal moment in market psychology, where technological disruption is now treated as a primary macroeconomic variable, potentially reshaping investment strategies across fixed income and equities.