Treasuries head for best week since February as AI jitters halt bond rout

US Treasuries are heading for their best week since February, as AI jitters and a softening in interest rate rise expectations bring a months-long global bond rout to a halt.

The yield on 10-year US Treasuries, a reference rate for debt markets across the world, has fallen 0.16 percentage points this week to 5.09 per cent as the price of the debt has recovered.

That has marked a swift reversal to a sell-off sparked by the Iran war, and fuelled by a resilient US economy, that had taken US borrowing costs above 5.3 per cent last week to their highest since 2002, from below 4 per cent in late February.

But government bonds have rebounded this week, encouraged by a clamour for safe assets as worries over the sustainability of the AI boom sparked a sell-off in global chip stocks.

“Higher yields have attracted government bond buyers, along with a risk-off tone in tech stocks and a sense that the Federal Reserve may hold rates in October,” said Trevor Greetham, head of multi-asset investing at Royal London Asset Management.

The high yields on Treasuries have attracted a wave of buyers in recent months, with strong inflows and the biggest bond investors such as asset management giant Pimco saying yields were “much more attractive” against high equity valuations and tight credit spreads.

The reversal has also brought some relief to European economies that had seen their long-term borrowing costs touch the highest levels in decades after the recent sell-off.

UK 10-year borrowing costs are down 0.08 percentage points this week at 5.37 per cent, while French 10-year yields are down 0.05 percentage points at 4.8 per cent.

The Treasury rally came despite data this week showing a jump in US inflation to 3.7 per cent in September as the Middle Eastern conflict drove up fuel prices.

Traders initially responded to the figures by ditching bonds as they bet the Fed would lift interest rates even further than previously expected — at one point on Wednesday markets were pricing in four quarter-point rate rises over the coming year. But as the selling spilled into equity markets, the bond moves went into reverse as investors snapped up safe assets.

Futures markets now indicate only three rate increases over the next 12 months, after Fed chair Kevin Warsh signalled at an IMF summit in Bangkok on Friday that the higher-than-expected inflation had not changed his views on the US economy.

Investors said the market snapped back sharply from the recent bond sell-off in a traditional “risk-off” rally that had forced some investors to unwind their bets against government bonds. “The move has been driven by investor concerns over the AI cycle and position unwinds,” said Jefferies’ Mohit Kumar.

Despite steadying in Thursday afternoon trading, the tech-heavy Nasdaq 100 is down 3 per cent so far this week, its worst week since July.

The upswing in borrowing costs this year has put mounting pressure on global borrowers, especially lower-rated firms, and a slide in data centre bonds this week spooked the market over the sustainability of the AI boom. One investor said AI-linked borrowers were facing their “Darwin moment”.

Richard Saldanha, head of global equities at Aviva Investors, said the upswing in tech stocks “did defy gravity for a period of time” but ultimately the pressure from higher borrowing costs was beginning to tell.

Data visualisation by Ray Douglas