Traders flock to Treasury market for safety as tech-led stock selloff deepens

By Joy Wiltermuth

A record $8 trillion in cash is now also on the sidelines in U.S. money-market funds, according to the latest ICI data

Traders trying to cut their losses during a brutal stock-market selloff on Thursday were flocking to shorter-term Treasury notes for safety.

The 2-year Treasury yield BX:TMUBMUSD02Y tumbled 10.4 basis points to 4.48%, its lowest yield since Sept. 9, according to Dow Jones Market Data.

Treasurys can provide ballast to investor portfolios by offering a fixed income stream in uncertain times. Yet when inflation runs hot, capital socked away in longer-term bonds can lose value.

Inflation pressures, however, weren't the main focus on Thursday.

"What the market is reacting to is the equity weakness right now," said Brij Khurana, a fixed-income portfolio manager at Wellington Management. Buying in front-end Treasury notes was dragging yields sharply lower, with traders starting to price in "the tail risk that stocks go down significantly," Khurana added.

The rise in yields this year also has made owning longer-term bonds more attractive to investors. Longer-dated yields hit a 24-year high in October, with the 10-year rate BX:TMUBMUSD10Y climbing to 5.3%, a level that attracted buyers.

This week, investors' heavy exposure to tech stocks became a growing concern following the midterm elections, which will put Democrats in control of Congress in January. The fear is that voter opposition to data centers could cause the artificial-intelligence buildout to stall. That could lead to roadblocks for the beneficiaries of the AI race, which is one reason semiconductor stocks SOX have fallen so sharply.

Furthermore, the economy and U.S. household wealth from stock ownership now heavily relies on the AI buildout. Fears about both being due for a negative shock helped push more cash to the sidelines, with U.S. money-market funds swelling to a record $8.016 trillion, according to the latest data from the Investment Company Institute.

The Nasdaq Composite COMP fell more than 5% Thursday, joining the Nasdaq-100 NDX in correction territory, while the S&P 500 index SPX was 4.2% lower and the Dow Jones Industrial Average DJIA was off 3.4%, according to FactSet.

"Sometimes selling begets more selling, and that seems to be the case today," said Mike Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management.

"With such a dramatic selloff in equities today, and other risk assets repriced accordingly, Treasurys are proving that they will serve as the risk-free asset," Lorizio added.

The pain in equities appears to have diminished expectations for a December interest-rate hike by the Federal Reserve. The chances tumbled to 66.1% on Thursday from 82.7% a day before, according to the CME FedWatch Tool. Fewer rate hikes through March were also expected.

Fed Chairman Kevin Warsh, in an October press briefing after the central bank held rates steady, said he wasn't looking to "throw sand in the gears of the economy and throw people out of work."

"We still think the Fed hikes twice - once in December and in March," said Leslie Falconio, head of fixed-income strategy at UBS's Chief Investment Office. "But there's a cap on how much the Fed can be restrictive."

Falconio said the UBS team isn't expecting the AI buildout to stop or the economy to falter, but that the buildout could take longer after the Democrat's "blue sweep." But there's now less concern about growth overheating that would require the Fed to deliver aggressively tighter financial conditions, she added.

Of note, growth scares tend to send longer-dated Treasury yields sharply lower. The 10-year yield was only down 5 basis points to 4.48%, according to FactSet. That could reflect hesitation ahead of Friday's jobs report for October, Falconio said.

The expectation on Wall Street is for the report to show a labor market that remains healthy, albeit stuck in a low-hire, low-fire scenario.

"A strong jobs report probably would be more negative to stocks than bonds," said Khurana at Wellington Management.

-Joy Wiltermuth

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11-05-26 1619ET