Investors are flooding back into Treasurys for safety to hedge the risks of more AI fallout in stocks and credit markets
Investors are judging the artificial-intelligence trade with more scrutiny.
The $32 trillion U.S. Treasury market was getting a big boost on Thursday, as stocks tied to the artificial-intelligence boom tumbled and investors rushed to safety in bonds.
After weeks of selling in long-dated Treasurys, during which yields jumped above 5%, investors were aggressively switching course and flocking back to bonds - testing whether yields can now stay below that psychologically important threshold.
The dramatic move lower in yields stems from worries about potential further weakness in highflying parts of the stock market DJIA SPX COMP as investors second-guess the power of the AI trade. Risks also remain around the energy shock from the Iran war persisting and whether the Federal Reserve will need to keep raising interest rates to fight inflation.
Against this backdrop, market makers have been reporting heavy and aggressive buying in Treasury futures, said Mike Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management. The price action in the Treasury market seems to be well supported by trade flows, he added.
At last check, the benchmark 10-year Treasury yield BX:TMUBMUSD10Y was down 12 basis points to 4.99%, according to FactSet. That's a huge drop from its 5.36% intraday high set on Oct. 7, which was its highest intraday level since April 2002, according to Dow Jones Market Data.
The 10-year yield touching 5.3% has been something of a resistance level lately, as MarketWatch has reported. After its drop, any sustained move below 5% will be important to watch.
"That goes to show that, in the event there are concerns about risk assets, Treasurys will continue to be that flight-to-quality asset class," Lorizio said. "That's where people want to park their money when concerns about the market arise."
This comes as shares of megacap tech stocks MAGS and many of the "hyperscalers" of the AI trade were under pressure Thursday, as were semiconductor SOX and memory DRAM stocks, as well as CoreWeave (CRWV) and other neoclouds.
"The safe-haven trade is back in action," said Adam Turnquist, chief technical strategist at LPL Financial. "There's a lot of angst going into earnings and AI is on trial."
Another potential factor in the Treasury rally could be technical. Treasury Secretary Scott Bessent had little success trying to coax long-dated U.S. government bond yields lower by increasing buybacks of this type of debt. Yet the AI debt deluge helping to finance the data-center and infrastructure boom - which is making capital more expensive - has recently eased up.
"Less issuance can ease the Treasury selling tied to hedging new deals," said Vincent Ahn, portfolio manager at SLW Investments. "Add haven buying, and you have less selling pressure alongside more demand for protection. That can support a rally without much changing in the economic data, he added.
Bond supply from the hyperscalers in recent months included huge $25 billion individual bond offerings from the likes of Amazon.com (AMZN), Alphabet (GOOGL) (GOOG), SpaceX (SPCX) and others.
Yet the "tell" is that Treasurys were rallying on Thursday despite higher oil prices (CL00) (BRN00) and firm jobs data, Ahn noted. "That looks like investors buying protection even as inflation risk rises," he said.
Furthermore, in reporting their earnings Wednesday, Meta Platforms (META) raised its spending outlook while Tesla (TSLA) cut its own spending guidance - yet both stocks were lower Thursday.
"To me, the question investors are asking is simple: When does all this spending pay off?" Ahn said.
-Joy Wiltermuth