US yields climb as AI fears cool

By Chuck Mikolajczak

NEW YORK, Oct 19 (Reuters) - US Treasury yields rose on Monday, with the benchmark 10-year Treasury yield coming off its biggest weekly drop in seven months, as concerns about the impact of higher interest rates on AI stocks abated.

The 10-year yield dropped 14.6 basis points last week, even after hotter-than-expected inflation readings in the form of the consumer price index and producer price index, as equity markets sold off due to worries that investments in AI infrastructure stocks could begin to dry up, boosting the safe-haven appeal of Treasuries.

But stocks were higher on Monday, as AI stocks recovered and helped push the Nasdaq Composite .IXIC up more than 1%.

"The last couple of days last week, you saw somewhat of the flight to quality based on what was happening in the equity markets, and so now for today, you see that trend reversing a little bit," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"It's somewhat muted, but at least that trend seems to be continuing, but in the other direction, so instead of risk off within the equity markets driving a flight to quality in fixed income, now you start to see a little bit of a reversal of that."

The yield on the benchmark US 10-year Treasury note rose 4.2 basis points to 5.14%.

HOUSING MARKET INDEX HITS 12-YEAR LOW

In a sparse week for major economic data, the National Association of Home Builders/Wells Fargo Housing Market index on Monday showed a drop of three points to 29 this month, the lowest level since June 2012 and below the 31 estimate of economists polled by Reuters.

The yield on the 30-year bond gained 4 basis points to 5.477%.

Oil prices erased earlier declines after attacks by Yemen's Iran-aligned Houthis on a Yemeni military training camp and renewed attacks on Saudi energy, airport and military facilities, keeping Brent crude near five-month highs.

BOND AUCTIONS SCHEDULED THIS WEEK

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , seen as an indicator of economic expectations, was at a positive 37.5 basis points.

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

The two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, added 2.5 basis points to 4.761%.

Expectations for a rate hike of at least 25 basis points from the Federal Reserve at its policy meeting next week stand at 17.2%, according to CME FedWatch, down from 21% a week ago and 57.6% a month earlier.

Bank of America US economist Aditya Bhave said in a note on Monday that the firm is keeping its call for a hike at the central bank's upcoming meeting in light of the recent inflation data, albeit "with low conviction."

The breakeven rate on five-year TIPS was last at 2.395% after closing at 2.381% on Friday.

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.