Treasury Yields Move Lower

The yield on the 10-year US Treasury note erased its early pullback on Tuesday to hover above the 5.2% threshold, as markets continued to assess the magnitude of inflation risks from higher energy prices and the outlook for bond issuance by the tech sector. Energy benchmarks recovered in the session as the tight supply backdrop is likely to persist. Signals that Saudi Arabia would strike Houthi targets prolonged the conflict that jeopardizes tanker flows through the Red Sea, while evidence of low oil loadings at Russian Black Sea ports erased any signals that Russia would step up energy exports. Still, improvements in Chinese AI chip technology raised concerns of foreign competition for domestic semiconductor giants, limiting the outlook for corporate credit. The latest research showed industry players penning $4.1 trillion in AI-related debt to be issued by 2030, crowding out the Treasury in its issuance of new securities.

The US 10-year Treasury yield fell 5bps to 5.19% on Tuesday, retreating slightly from the 24-year highs touched earlier this month, as traders returned from a long weekend amid rising safe-haven demand and falling oil prices. Weakness in the tech sector, particularly semiconductor and chip stocks, amid renewed concerns over the AI trade, spread globally, prompting investors to seek safer assets. Meanwhile, oil prices declined after a three-day winning streak, providing additional support to the bond market. Investors are also awaiting key US inflation data this week, including Wednesday’s CPI report, for further clues on the trajectory of inflation and the Fed’s next policy steps. Meanwhile, traders have scaled back bets on another 25bps rate hike this month, with the probability of such a move currently standing at around 19%. For December, markets are pricing in a nearly 72% chance of a 25bps increase in the fed funds rate.

The yield on the US 10-year Treasury note fell below 5.2% on Tuesday as bond trading resumed after a market holiday, extending its retreat from 24-year highs after the recent global bond selloff lost momentum. Investors also turned their attention to key inflation data due this week that could influence the Federal Reserve’s monetary policy outlook. The US consumer price index report is scheduled for Wednesday, followed by producer inflation data on Thursday. Markets are pricing in roughly an 80% probability that the Fed will keep interest rates unchanged this month, while assigning nearly an 88% chance of a rate hike in December. Investors will also assess existing home sales figures and remarks from Fed officials Christopher Waller, Tom Barkin and Susan Collins on Tuesday. Meanwhile, escalating geopolitical tensions in the Middle East and Eastern Europe continued to support elevated oil prices, adding to inflationary pressures.