Treasury Yields on Pace for Third Weekly Drop as AI Spending Fears Fuel Safety Bid

U.S. Treasury yields paused their recent rally on Friday but remained on track for a third straight weekly decline, as a market-wide flight to safety continued amid growing investor anxiety over the immense cost of building out artificial intelligence infrastructure.

AI Capex Jitters Trigger Bond Rally

The recent surge in demand for government debt was sparked by renewed concerns about the financial strain of AI development on major technology companies. The catalyst was Meta Platforms, which projected its 2026 capital expenditures could reach $135 billion to $145 billion, while also introducing a new class of non-voting shares to help finance its AI ambitions.

These concerns were compounded by a recent Gartner report warning that over $3.5 trillion in AI infrastructure investments could face impairment risk by 2030. The developments have cast a shadow over the tech sector, prompting investors to shift capital from equities into the relative safety of government bonds.

A Sharp Reversal in Yields

Bond markets experienced a dramatic rally on Thursday. The benchmark 10-year Treasury yield plunged 19.3 basis points to 4.953%, its largest single-day drop since March 2023. The 30-year and 2-year yields also saw significant declines of 15 basis points and 18.5 basis points, respectively.

On Friday, yields saw a modest rebound from one-month lows:

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• The 10-year Treasury yield rose about 4 basis points to 4.995%.
• The 30-year Treasury yield climbed 2 basis points to 5.308%.
• The policy-sensitive 2-year Treasury yield traded near 4.66%.

This week's decline marks a significant reversal for the 10-year yield, which had climbed as high as 5.3645% earlier in the month, a peak not seen since 2002.

Market Outlook and Conflicting Signals

The bond rally has shifted expectations for Federal Reserve policy. According to the CME FedWatch Tool, traders now see the probability of a rate hike at the Fed's next meeting at just 7.2%. However, the odds of at least one 25-basis-point hike by December remain around 80%, down from nearly 90% earlier in the week.

Countering the flight-to-safety narrative are persistent inflation risks, highlighted by a spike in oil prices Friday. Geopolitical tensions, including new attacks on Saudi facilities, pushed Brent crude futures toward $114 per barrel, a near five-month high. With key policy meetings for the Federal Reserve, European Central Bank, and Bank of Japan on the horizon, markets are likely to remain caught between safe-haven demand and lingering inflation concerns.