Rising risk aversion overpowered inflation worries on Thursday, October 15, driving broad gains across US and European government bonds. Both the benchmark 10-year Treasury yield and the rate-sensitive 2-year Treasury yield plunged more than 10 basis points intraday. Medium- and long-term government bond yields in major European economies including the UK, Germany, and France fell in tandem, sparking a broad rebound across global bond markets.
The US September Producer Price Index (PPI) released during European trading hours on Thursday posted its fastest month-over-month gain in more than four years, initially intensifying market concerns that the Federal Reserve might raise interest rates further. However, as financing risks for AI-related companies escalated and technology stocks came under pressure, investors began reassessing the impact of elevated interest rates on economic growth and corporate debt-servicing capacity, with safe-haven demand driving capital flows into the government bond market.
Media outlets noted that the market is shifting from worrying about inflation toward paying closer attention to how high financing costs affect economic growth. Meanwhile, credit risks at AI-related companies such as CoreWeave drew intense scrutiny, and the divergence between corporate bond and government bond performance highlighted the market's repricing of risks across different asset classes.
10-year Treasury yield falls for a third straight day, touching 5.04% intraday as US and European long bonds rally broadly
Buying activity in the US Treasury market strengthened markedly on Thursday. The 10-year Treasury yield dipped to around 5.04% intraday, down roughly 15 basis points for the session, hitting its lowest level since September 23 and marking a third consecutive day of declines. The 30-year Treasury yield also fell notably, dropping about 12 basis points intraday.
The 2-year Treasury yield, which is more sensitive to the monetary policy outlook, briefly broke below 4.69% during early US trading on Thursday, touching its lowest level since September 18 with an intraday drop exceeding 10 basis points, retreating after a rebound on Wednesday.
US and European long bonds strengthened in unison. By the end of European trading on Thursday, the UK 10-year government bond yield had fallen 5.4 basis points to 5.371%; the 30-year UK gilt yield dropped 6.4 basis points, while the 2-year yield declined 2.1 basis points.
By the close of European trading, the German 10-year government bond yield had declined 5.3 basis points to 3.413%; the 30-year German bund yield fell 5.3 basis points, and the 2-year yield dropped 1.7 basis points.
French government bonds outperformed. By the close, the 10-year French government bond yield had fallen 8.5 basis points to 4.796%; the 30-year yield declined 8 basis points, and the 2-year yield dropped 3 basis points.
Overall, long-end yields across US and European bond markets declined broadly, with long-end declines exceeding short-end moves in several markets. The sharp pullback in US Treasury yields and the synchronized strengthening of long bonds in major European economies reflect investors reassessing the relationship between inflation, growth, and financial market risks.
Inflation data remains hot, but the market is starting to worry about the growth cost of high interest rates
The key driver behind this round of US Treasury gains lies in the market's new balancing act regarding inflation and the interest rate outlook.
The fastest gain in US September PPI in more than four years shows that upstream price pressures remain evident. After previous inflation data exceeded expectations, the market had briefly increased bets on further Fed rate hikes, pressuring Treasury yields.
But hot inflation did not prevent government bond prices from rebounding on Thursday. As the market reassessed the impact of high financing costs on corporate investment, consumption, and economic growth, investors began increasing allocations to relatively safe assets such as government bonds.
The Wall Street Journal observed that investors' earlier concerns about persistently high inflation are now shifting toward greater focus on the potential hit to economic growth from elevated borrowing costs. The German 10-year government bond yield also touched a multi-week low, showing that this repricing is not limited to the US market.
This does not mean the market has concluded that inflation risks have disappeared or that the risk of Fed rate hikes has been removed. More precisely, investors are weighing two risks: on one hand, persistent price pressures could force the Fed to maintain tight policy; on the other hand, high interest rates could weigh more heavily on economic activity through financing costs, corporate cash flows, and financial market risk appetite.
AI credit risks intensify as government bond gains coexist with rising corporate financing costs
Beyond macroeconomic factors, the concentrated exposure of financing risks in the AI supply chain also became a focal point of Thursday's market.
Recently, AI cloud computing service provider CoreWeave saw its stocks and bonds sold off, with financing costs surging dramatically. Yields on some of the company's bonds have risen above 15% to 16%, and its five-year credit default swap (CDS) spread hit a record high intraday, reflecting significantly heightened concerns about its debt-servicing capacity.
The risk is not confined to CoreWeave alone. Oracle's five-year CDS spread was quoted at 288 basis points intraday, 28 basis points wider than a week earlier; SoftBank's five-year CDS spread widened by 24 basis points in a single day to 424 basis points. Related spreads for large technology companies including Amazon, Google parent Alphabet, and Meta also rose to historic highs.
Some media outlets linked the recent decline in US Treasury yields to the surge in AI-related corporate financing costs, noting that pressure in technology stocks and the AI infrastructure sector is pushing capital toward safe-haven assets such as government bonds.
This also explains why government bond yields could fall notably despite hot inflation data. Normally, rising inflation might push up market interest rate expectations and weigh on government bonds; but when credit risks and stock market volatility intensify, safe-haven demand can temporarily overpower inflation factors, driving government bond prices higher.
However, the divergence between government bonds and corporate bonds also deserves attention. Falling government bond yields do not mean financing costs are declining for all borrowers. For AI companies with weaker credit profiles that rely on continuous borrowing to expand, even if the risk-free rate declines, widening credit spreads could still push up their actual financing costs.
Whether the bond rally can continue still depends on the tug-of-war between inflation and growth risks
Thursday's global bond market rally reflects a shift in market trading logic: with inflation pressures not yet subsiding, investors are beginning to place greater emphasis on the impact of high financing costs on economic growth, corporate debt-servicing capacity, and financial market stability.
If upcoming inflation data continues to run hot, the Fed may need to maintain tighter monetary policy or even raise rates further, which would once again exert upward pressure on Treasury yields. Conversely, if credit risks continue to spread and corporate financing and investment activities are suppressed, safe-haven demand could continue to support government bond prices.
The most noteworthy divergence currently is that falling government bond yields and rising credit financing costs for some AI companies can occur simultaneously. The former reflects changes in the risk-free rate and safe-haven demand, while the latter reflects the market's repricing of specific companies' debt-servicing capacity and business models.
For the bond market, what needs to be watched next is whether US inflation can cool, whether economic growth shows more pronounced signs of slowing, and whether AI infrastructure investments can deliver expected returns. Until these signals become clearer, the rapid decline in government bond yields looks more like the market searching for a new balance between inflation and growth risks rather than an indication that the inflation threat has been resolved.
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