The bond market now has an even bigger fear than the AI fallout

By Joy Wiltermuth

The sharp selloff in tech stocks made Treasurys look more attractive in recent weeks, but another big driver of yields is emerging

Treasury yields were touching fresh November highs on concerns about Federal Reserve interest-rate hikes meant to slow inflation.

Investor fears were hitting the $32 trillion Treasury market again on Thursday.

Bond yields tumbled in October as artificial-intelligence stocks sold off sharply, leading to panic buying of relatively safe Treasurys. Bond prices and yields move in opposite directions.

But those same rates - including ones used to finance households, the U.S. government and the AI spending boom - were back climbing Thursday to their highest levels of November.

"The fact of the matter is the Fed could be quite a ways away from where they need to get," said Robert Tipp, head of global bonds at PGIM Credit, on Thursday. The market had gotten too comfortable with the idea that the Federal Reserve might be able to go light on interest-rate hikes, he noted. But hot inflation data this week and an upswing in the labor market in October now suggests otherwise.

"What had happened was the market got ahead of the Fed too far," Tipp told MarketWatch.

Traders had the odds of two Fed rate hikes through the end of January at nearly 70% on Thursday, up from 11% a week ago, according to the CME FedWatch Tool. Rate hikes can hurt the value of older bonds with lower coupon payments.

The whiplash had investors back to shunning Treasury notes and bonds. That was causing yields to rise to fresh November highs as prices fell. The 2-year Treasury yield BX:TMUBMUSD02Y was up another 13 basis points to 4.86% early Thursday, while its 10-year counterpart BX:TMUBMUSD10Y was 11 basis points higher to 5.10%, according to FactSet data. One basis point equals 0.01 percentage point.

Those were the highest intraday yields for 2-year, 10-year and 30-year Treasurys BX:TMUBMUSD30Y since Oct. 21, according to Dow Jones Market Data.

In recent weeks, investors had been treating the Treasury market as a safe-haven in light of "equity-market correcting, doubts about AI and the election outcome," said Tripp. "I think investors got a bit complacent on the pricing of Treasurys."

Renewed selling pressure in tech stocks Thursday, following the shock developments that led to Nvidia (NVDA) CEO Jensen Huang's resignation, wasn't improving the appeal of bonds on Thursday. Intrigue instead was building around possible replacements for Huang, who quickly became the face of U.S. dominance in the AI race in recent years.

Meanwhile, investors caught off guard by October's surprising Treasury rally appeared to be holding out for higher interest rates. It was only early October when yields hit a 24-year high, and then plunged.

"Many institutional accounts are waiting for higher yields," said Tom di Galoma, managing director of global rates trading at Mischler Financial Group, on Thursday. "Many have told me they'd like to buy the long end, but that [Treasurys] still need to sell off a bit before jumping in."

More clarity on that front will come as the Treasury Department auctions $25 billion of 30-year bonds at noon Thursday, and releases results at 1 p.m. Eastern.

The Treasury Department needs to keep financing a nearly $2 trillion budget deficit. In early November, it opted not to immediately cut the size of its auctions of longer-dated Treasurys, as some had expected. Less supply should help increase demand and lower yields.

President Trump also resumed talking tough on Iran on social media early Thursday. "We don't need a deal with Iran," he wrote in a Truth Social post. Yet global Brent crude prices (BRN00) were 1.6% higher to about $94 a barrel. They were at $114 a barrel in late October.

-Joy Wiltermuth

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(END) Dow Jones Newswires

11-12-26 1211ET