US Treasury yields experienced one of their strongest weekly rallies this year as concerns about artificial intelligence (AI) growth prospects and easing expectations for interest rate hikes halted a months-long global bond sell-off. The 10-year US Treasury yield, a key benchmark in debt markets worldwide, fell to 5.13 percent on Friday, down 0.12 percentage points for the week. This decline in yield corresponds to rising bond prices, marking a reversal from last week’s spike to above 5.3 percent, the highest level since 2002.
The recent sell-off had been driven by geopolitical tensions in the Middle East, specifically the Iran conflict, as well as a resilient US economic outlook. However, the latest rebound in Treasuries was fueled by a renewed demand for safe-haven assets amid escalating doubts about the sustainability of the AI boom, which led to a sell-off in technology stocks. Chipmakers and cloud computing companies were particularly affected, with shares of firms such as Micron falling nearly 4 percent and CoreWeave losing over 10 percent in value.
Market participants noted that the higher yields on government bonds have attracted buyers seeking value relative to elevated equity valuations and narrow credit spreads. Major asset managers like Pimco highlighted that Treasury yields have become “much more attractive” in recent months. The rally also eased borrowing costs for several European economies, where long-term yields had surged to multi-decade highs during the bond rout. The UK’s 10-year government bond yield declined to 5.38 percent, and Italy’s 10-year yield retreated to 4.48 percent by week’s end.
The Treasury rebound came despite data showing US inflation rose to 3.7 percent in September, partly driven by higher fuel prices linked to Middle Eastern instability. Initially, this inflation uptick prompted traders to reduce bond holdings amid bets the Federal Reserve would raise interest rates more aggressively. Markets briefly priced in as many as four quarter-point rate hikes over the next year. However, as selling pressure spread to equities, investors sought refuge in government bonds, reversing prior moves.
Fed Chair Kevin Warsh, speaking at an International Monetary Fund summit in Bangkok, indicated that the inflation increase had not altered his positive assessment of the US economy, reinforcing expectations that the central bank might pause rate hikes in October. Futures markets currently anticipate three rate increases over the next 12 months.
Analysts described the recent bond market reversal as a classic “risk-off” rally, prompted by investor concerns about the AI investment cycle and the unwinding of leveraged positions. The increase in borrowing costs this year has put significant strain on global borrowers, especially lower-rated firms, raising questions about the AI sector’s financial sustainability. Some investors have characterized this period as a “Darwin moment” for companies linked to AI. Richard Saldanha, head of global equities at Aviva Investors, noted that although technology stocks had defied downward pressure for some time, the cumulative impact of higher funding costs is beginning to affect the sector.