10-year Treasury yield falls below 5% on AI worries

Investors ran for cover this week as artificial intelligence fears and higher oil prices hit stocks, driving the yield on the 10-year U.S. Treasury note below 5%.

The benchmark yield was just under 5% on Friday, after falling beneath that level Thursday for the first time in a month, as investors continued to express misgivings over the massive debt tech companies are taking on to finance their build-out of AI networks.

Investors are also weighing higher energy prices as the Iran war drags on and are looking ahead to next week’s Federal Reserve meeting, said Art Hogan, chief market strategist at B. Riley Wealth.

“The massive selling of Treasurys in the month of September, bringing yields up by close to 50 basis points, clearly got ahead of itself,” he said. “What we’re seeing over the last two weeks is the slow unwind of that trade back to what is likely a more normalized level of yield.”

On Friday, the yield on the 10-year U.S. Treasury — used as a benchmark for borrowing costs including mortgages — rose more than 3 basis points to 4.988%.

The yield on the 2-year Treasury note, which more closely follows short-term Federal Reserve policy, increased by 5 basis points to 4.686%. Yields on longer-dated 30-year U.S. Treasurys climbed nearly 3 basis points to 5.314%.

One basis point equals 0.01%, or 1/100th of 1%, and yields and prices move inversely to one another.

This week’s rebound in Treasury prices comes just weeks after 10- and 30-year yields jumped to their highest levels in more than 20 years.

Since then, concerns have grown about the hundreds of billions of dollars being spent by tech companies. Stocks sank, bond yields on outstanding tech debt rose and spreads on credit default swaps widened in a host of AI companies.

CoreWeave has led the rout. The yield on its 9.75% bond due in 2031 stands at 15.75%, while the spread on its five-year credit default swaps is 1,140. Any reading above 1,000 is generally considered distressed.

The question remains whether the trend of lower Treasury yields will continue, said Byron Anderson, head of fixed income at Laffer Tengler Investments.

“With a Federal Reserve that is focused on inflation and largely out of the bond market as a buyer, it is hard to see a sustained rally without the market narrative flipping to recession,” he said. “We are far from the recession narrative, with two Fed rate hikes still built into expectations and a good economic backdrop.”

The Federal Reserve meets next week and the market isn’t expecting any change in official rates from the current level of 3.75% to 4.00%. However, it is pricing in a roughly 78% probability of a quarter percentage point hike in December, according to the CME Group FedWatch tool.

“At this stage, the tightening of financial conditions hasn’t been dramatic enough to preclude another rate hike this year, although a sustained deterioration could readily alter the Fed’s policy calculus,” BMO Capital Markets’ credit strategy team said in a note Friday.

Consumer sentiment changed little in October from historically low levels as inflation weighed on the economic outlook, according to a University of Michigan survey released Friday.

The survey showed the headline consumer sentiment index at 48 for the end of the month, off just 0.1 point from September and better than the Dow Jones consensus for 46.3. Compared with a year ago, the gauge tumbled 10.4%.

On inflation, the one-year outlook rose to 4.7%, while the five-year expectation accelerated to 3.5%, both 0.1 percentage point higher than September.

Also on Friday, the S&P Global Purchasing Managers Index for manufacturing came in hotter than expected, at 56 versus a 55.3 estimate, the highest reading in 53 months.

Meanwhile, rising energy costs continue to weigh on the inflation outlook.

West Texas Intermediate futures for December delivery climbed more than 3% to top $102 a barrel on Friday, while Brent crude, the international oil benchmark, traded almost 3% higher at roughly $116 a barrel.

Firmer energy prices come as fresh attacks by Iran-backed Houthi militants against Saudi Arabian oil installations drove new fears over an oil supply squeeze. Reports earlier this week suggested that the U.S. and Israel could resume strikes against Iran following the midterm elections on Nov. 3.

— CNBC’s Jeff Cox contributed reporting.