US yields dip as AI risk weighed, 20-year auction on deck

By Chuck Mikolajczak

NEW YORK, Oct 21 (Reuters) - US Treasury yields declined on Wednesday, as investors gauged the impact of higher interest rates on AI stocks that have helped propel economic growth, ahead of an auction of 20-year bonds later in the day.

Yields have been sensitive to movements in the equity markets in recent days, as concerns about the impact of higher borrowing costs on AI infrastructure stocks such as CoreWeave CRWV.O have at times weighed on stocks and increased the safe-haven appeal of Treasuries, sending yields lower.

US stocks were slightly higher on Wednesday, buoyed in part by a surge in SpaceX SPCX.O shares after its quarterly results eased some worries about the AI sphere, but CoreWeave shares dipped.

"There has been a very clear trade-off across capital markets in almost a risk-on, risk-off rotation where equities will draw down and we'll see flows in and out of the Treasury market," said Bill Northey, senior investment director at U.S. Bank Wealth Management, Billings, Montana.

"Similarly, sitting here at 5.1% on the 10-year Treasury, is clearly an area where it provides competition for flows of capital from what has been a very strong equity market, but now there are real alternatives as we look to the fixed income markets and even spread products off of Treasury markets."

The yield on the benchmark US 10-year Treasury note fell 1.5 basis points to 5.102% and was on track for its second straight daily decline.

TREASURY AUCTIONS AHEAD

More supply will come to the market this week when Treasury auctions $13 billion in 20-year bonds later on Wednesday and $26 billion in 5-year US Treasury Inflation-Protected Securities (TIPS) on Thursday.

The yield on the 30-year bond slipped 1.2 basis points to 5.413%.

Concerns about AI-related stocks last week led to a slump in equity markets, which drove US yields lower as investors looked towards safer assets, and the 10-year yield dropped 14.6 basis points on the week, its biggest weekly fall in eight months.

AI CONCERNS DRIVE SAFE-HAVEN FLOWS

The decline came even as economic data showed hotter-than-expected inflation readings, although expectations for an interest-rate hike from the Federal Reserve at its meeting next week remain muted.

A closely watched part of the US Treasury yield curve measuring the gap between yields on 2-year and 10-year Treasury notes , seen as an indicator of economic expectations, was at a positive 32.2 basis points.

Markets are currently pricing in a 14.9% chance for an increase of 25 basis points from the Fed at its October 28 policy announcement, down from 33.2% a week ago and 57.6% a month earlier, according to the CME FedWatch tool.

The 2-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, shed 0.9 basis point to 4.778%.

The breakeven rate on 5-year TIPS was last at 2.401% after closing at 2.399% on Tuesday, its highest close in five weeks.

The 10-year TIPS breakeven rate was last at 2.355%, indicating the market sees inflation averaging about 2.4% a year for the next decade.