U.S. Treasury Yields Plunge as European Turmoil, Tech Jitters Fuel Safe-Haven Demand

U.S. Treasury yields plunged across the curve on Thursday in a classic risk-off session, as a flight to quality sent investors flocking to the safety of government debt. The move was driven by mounting concerns over corporate spending on artificial intelligence and a deepening fiscal and political crisis in France, pushing the benchmark 10-year Treasury yield to its lowest close in over a month.

A Broad-Based Rally in US Debt

The rally in U.S. government bonds was significant, with yields dropping sharply by the close of trading. Key moves included:

• The benchmark 10-year Treasury yield fell 19.8 basis points to close at 4.951%, its lowest finish since September 17.
• The 30-year Treasury yield dropped 15.1 basis points to settle at 5.286%, its lowest close since September 9.
• The rate-sensitive 2-year Treasury yield declined by 17.5 basis points to end the day at 4.648%.

This broad decline in yields reflects a surge in demand for Treasurys as investors sold off riskier assets, particularly in the technology sector, and sought shelter in government paper.

Dual Catalysts: AI Jitters and European Woes

The flight to safety was triggered by a combination of domestic and international factors. In the U.S., investor anxiety grew around the large capital expenditures required for AI infrastructure. Meta Platforms' latest report, which pointed to rising spending forecasts and a new stock class to raise capital for AI, amplified these jitters.

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"Tech stocks are plunging as lackluster earnings reports spark worries about an AI slowdown, with investors increasingly unsure about the return prospects of massive investments," said José Torres, senior economist at Interactive Brokers. "That caution has participants charging into safe-haven Treasurys."

Across the Atlantic, a worsening fiscal crisis in France spooked global markets. The yield on 10-year French government bonds (OATs) surged past 5.00% to a 24-year high as investors demanded a higher premium to hold French debt. The yield spread between French OATs and benchmark German Bunds widened to approximately 157 basis points, a level approaching extremes seen during the 2011 eurozone debt crisis. This turmoil in a core European economy directly channeled capital into the relative safety of U.S. Treasurys.

Central Bank Outlook

The sharp drop in Treasury yields provides a degree of natural easing in financial conditions ahead of the Federal Reserve's upcoming policy meeting on October 28. Money markets are overwhelmingly pricing in the Fed holding its key interest rate steady in the current 3.75% to 4.00% range.

Meanwhile, the European Central Bank is also expected to hold its policy rate at 2.50% next week. However, traders are still pricing in a more than 80% probability of a 25-basis-point hike in December as policymakers contend with persistent inflation and tightening financial conditions exacerbated by the French bond market turmoil.