(Oct 23): US Treasuries surged — sending the US 10-year yield back below 5% — as investors sought shelter from tumbling share prices for companies leading the boom in spending on artificial intelligence (AI).
The rally trimmed yields across maturities by as much as 13 basis points (bps), with five- to 30-year yields reaching their lowest levels in nearly a month. In addition to haven demand, Treasuries benefitted from fading expectations for Federal Reserve interest-rates hikes next year.
With doubts about the sustainability of US economic growth if AI investment falters, investors flocked to bonds despite resurgent oil prices. Global benchmark Brent crude oil futures topped US$112 (RM456.83) a barrel for the first time since May after deadly attacks in Saudi Arabia heightened concerns that escalating Middle East hostilities could hit supply.
“It’s really encouraging for rates that Treasuries are behaving like a safe haven asset despite the higher oil price on the day,” said Michael Chang, interest-rate derivatives strategist at Citigroup Inc.
Stock-market declines have revived the haven status of US government debt in recent weeks. Previously, the oil-driven inflation resurgence since the US started a war with Iran in late February had driven yields to multi-year highs in anticipation of additional Fed rate hikes to contain it.
Shares of US semiconductor companies — a proxy for sentiment around AI investments — resumed falling on Thursday, sending the Philadelphia Semiconductor Index down as much as 6.3% to its lowest level since late July.
The path forward for the world’s largest government bond market may depend in part on whether elevated oil prices or worries about the AI stock trade gain the upper hand.
“Sentiment seems to be shakier these days as investors reconsider AI-related assets,” said Eugene Leow, senior rates strategist at DBS Bank Ltd. “With US yields still elevated by recent standards, investors may want to hedge off some of these risks by seeking safety in Treasuries.”
“Today’s price action highlights haven demand will overwhelm any worries about inflation and the Fed, if risk assets sour further. Given the higher coupon buffer to cushion total returns and still uncertain backdrop for the AI trade, bonds now hold more appeal,” says Tatiana Darie, macro strategist, Markets Live at Bloomberg Strategists.
Treasuries also benefitted along with German government bonds from the ongoing selloff in French debt. French yields across maturities reached multiyear highs, with the 10-year topping 5.14% for the first time since 2002, and they exceeded German counterparts by historically wide margins.
Despite retreating from session highs, the France’s 10-year yield exceeded Germany’s by more than 170bps, the most since 2011, when the euro debt crisis was at a fever pitch and speculation was mounting that the European Union could break apart. French financial assets have been hit by mounting investor anxiety about its debt burden and the eruption of cost-of-living protests.
The US bond rally trimmed the expected yield for an auction of five-year Treasury inflation-protected securities, or TIPS, at 1pm New York time. The auction was still poised to draw the highest yield for a five-year TIPS auction since October 2023.
A Bloomberg gauge of returns on Treasuries has climbed about 1.2% in October after rounding off its biggest monthly drop in almost two years in September.
“Even though oil has been slowly rallying, Treasuries have been feeling some safe-haven flows again,” said Kenneth Crompton, head of rates strategy at National Australia Bank.
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