Yields plummet as fears about AI boom sustainability flare

The Nasdaq slumped more than 2% as Meta shares lost nearly 8% 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 fell 19.3 basis points to 4.953% and was on track for its biggest daily drop since March 10, 2023.

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 shrunk to 7.2%, according to CME FedWatch, from 27.7% a week ago and 55.4% a month earlier. The yield on the 30-year bond tumbled 15 bps to 5.287% and was on pace for its biggest daily drop since August 2024.

An auction of $26 billion in 5-year US Treasury Inflation-Protected Securities (TIPS) was seen as solid by analysts at BMO Capital Markets, with non-dealer bidding of 94.5% above the 90.8% average for the past six auctions. The 2-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, stumbled 18.5 bps to 4.638%, 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 was last at 2.381% after closing at 2.413% on Wednesday, its highest close since September 15. The 10-year TIPS break-even rate was last at 2.333%, indicating the market sees inflation averaging about 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak Editing by Rod Nickel and Aurora Ellis)