10-year Treasury yield drops back to 5% this week as investors seek cover from AI worries

The benchmark yield stayed below 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 being taken on by technology companies to finance their build out of AI networks. Tech stocks sank, bond yields on outstanding tech debt rose and spreads on credit default swaps widened in a host of AI companies.

“The selloff in tech stocks drove the flight-to-quality bid, compounded by continued weakness in the French sovereign market,” BMO’s credit strategy team said in a note Friday. “Interestingly, the focus on weakness in the equity market … [has] overshadowed the move in the energy market, with Treasuries rallying despite WTI crude oil testing $100/bbl.”

On Friday, yields on 10-year U.S. Treasurys — used to price mortgages, auto loans and credit card debt — rose by 3 basis points to 4.99%.

The yield on the 2-year Treasury note, which more closely follows short-term Federal Reserve policy, increased by 4 basis points to 4.68%. Yields on longer-dated 30-year U.S. Treasurys — which react to geopolitical developments — climbed 2 basis points to 5.31%.

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

Since then, concerns have grown about the hundreds of billions of dollars being spent by tech companies. CoreWeave has led the rout, losing 10% on Thursday and 38% in October. The yield on its 9.75% bond due in 2031 stands at 15.72%, while the spread on its five-year credit default swaps is 1,138. 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 70% 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 said.

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 nearly 3% to $102.39 a barrel on Friday, while Brent crude, the international oil benchmark, traded 2.5% higher, at $115.94 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.