Last week, investors rotated heavily into safe-haven assets as mounting worries over AI capital spending and rising oil prices dealt a double blow to stock markets, briefly pushing the 10-year US Treasury yield below the 5% threshold.
The tug-of-war between bulls and bears in the Treasury market intensified, compounded by inflation expectations, manufacturing data, and geopolitical turbulence in the Middle East, leaving the market squarely focused on this week's Federal Reserve policy meeting.
Treasury Yields Fall Then Rebound as AI Corporate Debt Risks Surface
The 10-year Treasury yield dropped below 5% last Thursday for the first time in a month, then edged higher on Friday to close at 4.994%, with 2-year and 30-year yields moving up in tandem.
Chris Rupkey, chief economist at Fwdbonds, said the sharp pullback in the 10-year yield last Thursday left bond investors bewildered, while the only clear theme in Friday's market was the sustained rise in crude oil prices.
"This basically means inflation pressure will return, and bond yields are adjusting upward to absorb the impact of this round of energy price increases," he said.
Markets are worried that technology companies are taking on massive debt to build AI infrastructure, sending related stocks lower, pushing technology bond yields higher, and significantly widening credit default swap spreads. CoreWeave became the representative target of this selloff, with its 2031-maturity bond yield rising to 15.637% and its 5-year credit default swap spread exceeding 1,000—a level typically associated with distressed debt territory.
Can the Bond Rally Last? Institutional Views Diverge
Byron Anderson, head of fixed income at Laffer Tengler Investments, is cautious about whether Treasuries can sustain their strength.
"The Fed's policy focus remains on inflation, and it is no longer a buyer in the bond market. Without a shift in the market narrative toward recession, a sustained bond rally is hard to achieve. We are still far from recession expectations, the market is still pricing in two rate hikes, and economic fundamentals remain resilient," he said.
The market expects the Fed to keep rates unchanged at the 3.75% to 4.00% range at this week's meeting, but the CME FedWatch Tool shows the probability of a 25 basis point hike in December at roughly 71%.
Chris Rupkey predicts that Fed Chairman Kevin Warsh will struggle to give clear guidance to the bond market at Wednesday's press conference.
"We don't expect Warsh to directly greenlight a December rate hike, which would differ from the communication style during the Powell era," he said.
Consumer Sentiment Weak, Manufacturing Data Surprisingly Strong
A University of Michigan survey released last Friday showed that the US consumer sentiment index for October came in at just 48, a slight 0.1-point decline from September. While better than the consensus forecast, it remains at a historically low level, down 10.4% year-on-year.
The public's one-year inflation expectation rose to 4.7%, and the five-year inflation expectation climbed to 3.5%, both up 0.1 percentage point from September, as inflation pressure continues to weigh on household expectations.
The S&P Global manufacturing purchasing managers' index released the same day came in at 56, above the expected 55.3 and marking a 53-month high. The strong manufacturing data added further support to inflation and rate hike expectations.
Middle East Tensions Drive Oil Prices Higher as External Risks Persist
Energy prices have once again become a core variable for inflation. On Friday, US crude oil futures and Brent crude oil futures closed at $103.44 per barrel and $116.80 per barrel, respectively.
This round of oil price increases stems from Iran-backed Houthi forces once again attacking Saudi oil facilities, raising market concerns about a contraction in crude supply.
Trump said on Wednesday that the US will not negotiate with Iran and that related actions will be carried out soon. Earlier reports suggested that after the US midterm elections on November 3, the US and Israel may restart strikes against Iran, with geopolitical risks continuing to roil energy markets and inflation expectations.
Conclusion
The market is currently caught in a multi-way tug-of-war among AI debt risks, energy-driven inflation, economic resilience, and Fed policy, with Treasury yields showing clear short-term volatility.
Next week's Fed policy signals and the evolution of the Middle East situation will directly determine the future direction of the bond market, crude oil, and stocks.
10-year US Treasury yield daily chart. Source: Yihuitong. As of 12:05 Beijing time on October 26, the 10-year US Treasury yield stood at 4.961%.
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