10-year Treasury yield falls below 5% as AI debt concerns drive investors to bonds

The 10-year U.S. Treasury yield dropped below 5% for the first time in a month, driven by investor anxiety over the heavy debt burden technology companies are taking on to finance artificial intelligence infrastructure. This shift in sentiment saw the benchmark yield retreat under the 5% threshold on Thursday, a level it had not crossed in four weeks, as market participants moved away from riskier assets.

The retreat from equities coincided with a broader sell-off in tech stocks and a rise in bond yields for outstanding tech debt. Credit default swap spreads also widened across a number of AI-focused companies, signaling heightened concern over their creditworthiness. BMO's credit strategy team noted in a Friday report that the flight to quality was compounded by ongoing weakness in the French sovereign market. The bank observed that the focus on equity market weakness overshadowed developments in energy markets, where Treasuries rallied even as WTI crude oil approached $100 per barrel.

By Friday, the 10-year Treasury yield, which serves as a benchmark for pricing mortgages, auto loans, and credit card debt, had risen by 4 basis points to 4.997%. The 2-year Treasury note, which tracks short-term Federal Reserve policy more closely, increased by 5 basis points to 4.692%. Yields on 30-year U.S. Treasuries, which are sensitive to geopolitical developments, climbed by 3 basis points to 5.31%. A basis point represents 0.01%, or one-hundredth of a percent, and yields move inversely to bond prices.

Market attention now turns to next week's Federal Reserve interest rate decision and Friday's flash S&P Global PMI readings for manufacturing and services, which will provide a fresh perspective on U.S. growth and inflation. Inflation concerns remain elevated due to rising energy costs. West Texas Intermediate futures for December delivery rose 1.16% on Friday to $100.61 per barrel, while Brent crude, the international benchmark, traded 0.79% higher at $114.06 per barrel.

These firmer energy prices follow fresh attacks by Iran-backed Houthi militants on Saudi Arabian oil installations, which have intensified fears of an oil supply squeeze. Reports earlier in the week suggested that the U.S. and Israel could resume strikes against Iran following the midterm elections on Nov. 3.