Treasuries: Yields plunge as fears about sustaining AI boom resurface

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Today 16:16

Updates to morning trading
10-year yield on pace for biggest drop in more than 14 months
Treasury to auction $26 billion in 5-year TIPS on Thursday
CME FedWatch shows October Fed hike odds at 10.5%
By Chuck Mikolajczak
NEW YORK,  Oct 22 (Reuters) - US Treasury yields dropped on Thursday as equities declined after concerns about the sustainability of the AI outlook resurfaced, boosting the safe-haven appeal of government debt. 
The Nasdaq slumped about 2% as Meta META.O shares lost roughly 6% following the company's quarterly earnings report and announcement of new non-voting shares to help fund the social media company's AI expansion. 
Yields have dropped in recent days, as concerns about a slowdown in AI spending and its impact on economic growth have overshadowed economic data, which showed persistent inflation pressures. 
Investors had already priced in inflation and the prospect of Federal Reserve rate increases, but changes in risk assets and financial conditions are now fueling the bid for Treasuries, said Thomas Urano, co-chief investment officer at Sage Advisory in Austin, Texas.
"The battle between energy and inflation concerns and safe-haven demand in Treasuries has been going on, but in the last week, we see who's winning now. The flight-to-quality trade is winning in the Treasury space," Urano said.
     
TREASURY YIELDS TUMBLE ON SAFE-HAVEN BID
The yield on the benchmark US 10-year Treasury note US10YT=RR fell 12.3 basis points to 5.023% and was on track for its biggest daily drop since August 1, 2025. The yield had risen to 5.3645% on October 7, its highest since April 2002. 
Despite the recent data pointing to rising price pressures, markets have largely priced out any rate increase by the Fed at its policy meeting next week. The probability of a hike of at least 25 bps has fallen to 10.5%, according to CME FedWatch, from 27.7% a week ago and 55.4% a month earlier. 
The yield on the 30-year bond US30YT=RR tumbled 10 bps to 5.337% and was on pace for its biggest daily drop since February 2025.
More supply will come to the market on Thursday when Treasury auctions $26 billion in 5-year US Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR.
The 2-year US2YT=RR US Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 10.7 bps to 4.716%, on pace for its biggest decline since August 2025.
On the economic front, the Labor Department said weekly initial jobless claims fell 6,000 to a seasonally adjusted 194,000, below the 200,000 estimate of economists polled by Reuters, indicating the labor market may be picking up steam after a sluggish September. 
The break-even rate on 5-year TIPS US5YTIP=TWEB was last at 2.384% after closing at 2.413% on Wednesday, its highest close since September 15.
The 10-year TIPS break-even rate US10YTIP=TWEB was last at 2.336%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

Initial jobless claims and Challenger layoffs https://www.reuters.com/graphics/USA-STOCKS/znvngmqezpl/initialclaims.png
(Reporting by Chuck Mikolajczak
Editing by Rod Nickel)
((charles.mikolajczak@tr.com; @chuckmik.bsky.social))