Investors moved capital into safe-haven assets this week as mounting apprehension over the massive debt load taken on by technology companies to fund artificial intelligence networks triggered a sharp equities selloff. The benchmark yield on the 10-year U.S. Treasury note dropped below 5% for the first time in a month and remained under that threshold on Friday.
The equity downturn compounded ongoing weakness in the French sovereign market, according to credit strategists at BMO, who noted that market anxiety over falling tech stock prices completely overshadowed developments in the energy sector as Treasuries rallied.
On Friday, yields on 10-year U.S. Treasurys, which dictate pricing for mortgages, auto loans, and credit card debt, edged up by 3 basis points to 4.99%. Meanwhile, the 2-year Treasury note yield, closely tied to short-term Federal Reserve policy, increased by 4 basis points to 4.68%. Longer-dated 30-year U.S. Treasury yields, which react strongly to geopolitical shifts, climbed 2 basis points to 5.31%. One basis point represents 0.01%, or one-hundredth of a percentage point, with yields and prices moving inversely.
The recent rebound in Treasury prices follows a period just weeks prior when 10- and 30-year yields reached highs not seen in more than 20 years. Intensifying scrutiny over the hundreds of billions of dollars expended by technology giants has centered heavily on companies like CoreWeave, which suffered a 10% loss on Thursday and a 38% decline over the course of October. The yield on CoreWeave’s 9.75% bond maturing in 2031 stood at 15.72%, while the spread on its five-year credit default swaps reached 1,138. Financial market conventions generally treat any credit default swap reading above 1,000 as a sign of financial distress.
Byron Anderson, head of fixed income at Laffer Tengler Investments, noted that the persistence of lower Treasury yields remains an open question for the market. Without a broader shift in the market narrative toward recession, sustaining a bond rally is difficult given a Federal Reserve focused squarely on inflation and largely absent from the bond market as a buyer. With two Federal Reserve rate hikes still factored into market expectations and a solid economic backdrop, the broader recession narrative remains distant.
The Federal Reserve is scheduled to convene the following week, with markets anticipating no immediate change to official interest rates from the current target range of 3.75% to 4.00%. However, data from the CME Group FedWatch tool indicates that investors are pricing in a 70% probability of a quarter-percentage-point rate hike in December. Analysts at BMO Capital observed that while financial conditions have tightened, the shift has not been dramatic enough to entirely rule out another rate hike before the end of the year, though sustained market deterioration could alter central bank policy calculations.
Economic data released Friday offered mixed signals regarding consumer sentiment and manufacturing activity. The University of Michigan’s consumer sentiment index held steady at a final reading of 48 for October, improving slightly from a preliminary reading of 46.3 and pointing toward mild consumer optimism. Consumer inflation expectations for the upcoming year ticked up to 4.7% in October from 4.6% in September, while five-year annual inflation expectations increased to 3.5% from 3.4% the previous month.
On the manufacturing front, the S&P Global purchasing managers index exceeded expectations, coming in at 56 compared to an estimated 55.3 to mark its highest reading in 53 months. The services purchasing managers index reached 57.9 against a consensus estimate of 58.
Concurrently, climbing energy costs continued to exert upward pressure on the inflation outlook. West Texas Intermediate futures for December delivery advanced nearly 3% to settle at $102.39 a barrel on Friday, while international benchmark Brent crude traded 2.5% higher at $115.94 a barrel.
These firmer energy prices accompanied fresh attacks by Iran-backed Houthi militants targeting Saudi Arabian oil installations, which renewed anxieties over potential oil supply constraints. Additional market reports indicated that the United States and Israel could potentially resume military strikes against Iran following midterm elections on November 3.
