Treasury Yields Retreat After September’s Surge

US Treasury yields eased this week as investors reassessed risk across equity and credit markets. The 10-year Treasury yield briefly moved below 5% on Thursday, its first time under that threshold in a month, before rising more than three basis points to 4.99% on Friday.

The two-year Treasury yield increased five basis points to 4.686%, while the 30-year yield climbed nearly three basis points to 5.315%. Treasury yields and bond prices move in opposite directions, meaning the recent decline in yields reflected a recovery in bond prices.

The retreat followed a sharp September sell-off that pushed yields higher by nearly 50 basis points. Art Hogan, chief market strategist at B. Riley Wealth, described the recent movement as a gradual reversal of what he considered an excessive rise in yields.

The 10-year Treasury remains an important benchmark for borrowing costs, including mortgage rates, while the two-year yield is more closely influenced by expectations for Federal Reserve policy.

AI Borrowing Raises Credit Market Concerns

Investor anxiety has increasingly focused on the scale of debt technology companies are assuming to finance artificial intelligence infrastructure. As concerns have grown, technology stocks have weakened, yields on outstanding corporate debt have risen and credit default swap spreads have widened across several AI-related companies.

CoreWeave has been among the most affected. The yield on its 9.75% bond due in 2031 reached 15.75%, while its five-year credit default swap spread stood at 1,140 basis points. Such a spread is generally associated with distressed credit conditions.

The pressure highlights the potential consequences of expensive financing for companies committing substantial capital to AI infrastructure. However, the direction of Treasury yields will also depend on broader economic conditions and the Federal Reserve’s policy outlook.

Byron Anderson, head of fixed income at Laffer Tengler Investments, said a sustained Treasury rally would be difficult without a shift in market expectations toward recession, given the Fed’s inflation focus and reduced role as a bond buyer.

Inflation and Economic Data Shape Fed Expectations

The Federal Reserve is scheduled to meet next week, with markets expecting no change to its current federal funds rate range of 3.75% to 4.00%. Futures pricing cited in the report indicated an approximately 78% probability of a quarter-point rate increase in December.

Recent economic indicators complicate the outlook. The University of Michigan’s consumer sentiment index ended October at 48, down just 0.1 point from September but 10.4% lower than a year earlier. One-year inflation expectations increased to 4.7%, while five-year expectations rose to 3.5%.

Manufacturing activity also remained firm. The S&P Global Manufacturing Purchasing Managers’ Index registered 56, exceeding the 55.3 estimate and reaching its highest level in 53 months.

Meanwhile, rising energy prices are adding to inflation risks. December West Texas Intermediate futures climbed above $102 per barrel on Friday, while Brent crude traded near $116. Fresh Houthi attacks against Saudi Arabian oil installations and concerns about possible renewed US and Israeli strikes against Iran have intensified fears of supply disruption.

What Investors Should Watch Next

The interaction between AI financing risks, energy-driven inflation and Federal Reserve policy will remain central to bond market direction. If credit concerns deepen or economic activity weakens materially, demand for Treasuries could strengthen further. Conversely, persistent inflation and expectations of additional rate increases could limit the scope for a sustained decline in yields.

The upcoming Federal Reserve meeting, changes in oil prices and developments in technology company credit markets will provide important signals about whether the recent decline in longer-term Treasury yields can continue.