Reassessment of the outlook for artificial intelligence trading is reshaping market risk appetite, reinvigorating the safe-haven status of US Treasuries.
On Thursday, US Treasury yields fell across the board by at least 3 basis points, with the 30-year yield touching 5.38%, its lowest level since September 23. Meanwhile, the Japanese yen and Swiss franc strengthened in tandem, and bond markets in Australia and New Zealand rose in sympathy, underscoring a clear global shift of capital toward traditional safe-haven assets.
"Market sentiment has clearly become fragile of late, and investors are re-examining AI-related assets," said Eugene Leow, Senior Rates Strategist at DBS Bank:
"Doubts about profitability and return on investment are quietly spreading. With US Treasury yields still near recent highs, investors tend to hedge risk by buying government bonds."
It is worth noting that this safe-haven buying emerged just as oil prices rose on supply concerns following a deadly attack on Saudi Arabia, creating a tug-of-war between the two forces. BMO Capital Markets warned that ahead of the Federal Reserve's October 28 policy meeting, the narrow consolidation in the US Treasury market may have built up breakout momentum.
AI Trading Sentiment Cools, Safe-Haven Demand Revives
The stock market selloff served as the direct trigger for this round of Treasury gains. Mounting doubts about the profitability and return on investment of AI-related assets have reignited safe-haven demand for government bonds amid the resulting equity market weakness.
"Market sentiment has clearly become fragile recently, and investors have begun to reassess AI-related assets," said Eugene Leow, Senior Rates Strategist at DBS Bank. "Concerns about profitability and return on investment are quietly spreading. With US Treasury yields still at relatively high levels recently, investors may hope to hedge some risk by buying government bonds."
The yen's performance further confirms the spread of risk-averse sentiment. The yen appreciated 0.3% against the dollar to 157.68, while the Swiss franc also rose 0.2%. David Forrester, a strategist at Credit Agricole, noted that "the decline in S&P 500 futures provided upward momentum for the yen, and importantly, this rise was broad-based, even evident in the yen against the dollar, indicating that the yen's safe-haven status still holds when the AI boom encounters a shock."
Fed Meeting Approaches, US Treasuries May Face Directional Breakout
Technical signals suggest the consolidation period in the US Treasury market may be nearing an end. In a report released on Wednesday, BMO Capital Markets pointed out that Bollinger Band width has narrowed sharply from 80 basis points on September 28 to 24 basis points, and compression in market volatility often heralds a larger directional move ahead.
"To some extent, the current price action's meandering character suggests a breakout is imminent," BMO strategists wrote in the report.
The 2-year US Treasury yield, being most sensitive to monetary policy expectations, has closed each trading day since October between 4.70% and 4.82%, a range of only 12 basis points, yet intraday trading ranges have reached as wide as 27 basis points. Average daily swings since October have risen to 10 basis points, the highest monthly average since March this year.
BMO expects the Fed to keep rates unchanged at its October meeting, then raise rates by 25 basis points in December. However, market confidence in pricing a rate hike this year may already be excessive 鈥?the implied probability of a December hike is about 90%, and as new economic data are released, there is considerable room for this expectation to be revised.
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