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

Investors ran for cover this week as artificial intelligence fears hit stocks, driving the 10-year Treasury below 5%.

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 4 basis points to 4.997%.

The yield on the 2-year Treasury note, which more closely follows short-term Federal Reserve policy, increased by 5 basis points to 4.692%. Yields on longer-dated 30-year U.S. Treasurys — which react to geopolitical developments — were up 3 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.

The bounce back in Treasury prices comes just weeks after 10- and 30-year yields jumped to their highest levels in more than 20 years.

Since that time, concerns have grown about the billions being spent by tech companies. CoreWeave has led the rout, losing 10% on Thursday and 36% 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 stands at 1,138. Any reading above 1,000 is generally considered distressed.

Next week, the focus will turn to the Federal Reserve's interest rate decision, due on Wednesday. The market doesn't expect the central bank to raise rates this month, but is pricing in a roughly 72% 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.

Traders are awaiting Friday's flash S&P Global PMI readings on manufacturing and services for a fresh view on U.S. growth and inflation. Meanwhile, rising energy costs continue to weigh on the inflation outlook.

West Texas Intermediate futures for December delivery climbed another 1.6% to $101.10 a barrel on Friday, while Brent crude , the international oil benchmark, traded 1.4% higher, at $114.71 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.