US yields lower as AI risk gauged

By Chuck Mikolajczak

NEW YORK, Oct 20 (Reuters) - US Treasury yields dropped on Tuesday, but were off their earlier lows in choppy trading as investors gauged the risk associated with higher interest rates on AI stocks, while economic data showed slumping demand for housing.

Yields dropped last week as a tumble in AI infrastructure stocks over concerns that investments could dry up due to higher borrowing costs sparked safe-haven demand for Treasuries.

As losses in stocks such as CoreWeave CRWV.O were erased and the broader equity market turned higher shortly after the opening bell, yields moved off their earlier lows.

"The market is caught in a lot of cross-currents, and the bigger fundamental picture that's driven rates higher is the firm growth, the high inflation, and the notion that the Fed and the other world central banks, they're coming for it, and so that's pushed yields up," said Robert Tipp, chief investment strategist and head of global bonds at PGIM in Newark, New Jersey.

"At the intersection is that the short rates and the whole yield curve got ahead of the central banks, a tremendous amount of tightening priced-in in an environment when the central banks are going to be unlikely to raise rates rapidly. And so that left the market vulnerable to a snap back, a snap lower in yields, and the trigger for that has been the anxiety surrounding tech."

TEN-YEAR TREASURY FALLS

The yield on the benchmark US 10-year Treasury note fell 4 basis points to 5.096%.

Expectations for a rate hike of at least 25 basis points from the Federal Reserve at its policy meeting next week stand at 14.9%, according to CME FedWatch, down from 22.1% a week ago and 57.6% a month earlier.

The yield on the 30-year bond declined 5 basis points to 5.423%.

HOUSING MARKET WEAKENS

In a light week for economic data, reports on the housing market showed the impact of higher rates.

The Commerce Department said US single-family homebuilding and permits for future construction fell sharply in September while the National Association of Realtors said its pending home sales index tumbled 7.3% to 66.0 last month, the lowest level since the series started in 2001.

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 34.3 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 US 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, shed 0.8 basis point to 4.753%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.379% after closing at 2.39% on October 19.

The 10-year TIPS breakeven rate was last at 2.346%, indicating the market sees inflation averaging about 2.3% a year for the next decade.