year near flat with focus on Fed this week, AI company news

By Caroline Valetkevitch

NEW YORK, Oct 26 (Reuters) - The benchmark 10-year Treasury yield was little changed on Monday as investors awaited potential guidance on interest rates from the Federal Reserve this week and more earnings reports from major AI players.

AI company Anthropic's filing on Monday of its initial public offering paperwork pushed AI-related stocks and Wall Street higher, and AI will continue to be in focus with earnings reports due this week from Microsoft MSFT.O, Alphabet GOOGL.O and Amazon.com AMZN.O.

The benchmark 10-year yield remained below 5%. It registered last Thursday its biggest one-day drop in nearly four years amid a stock selloff triggered by fears over the sustainability of AI demand.

While the Fed is widely expected to leave interest rates unchanged when it announces its policy decision on Wednesday, investors do not believe a pause in rate hikes will last for long given lingering inflation concerns.

"I'm not sure (Fed Chairman Kevin) Warsh will give us a whole lot of sense" of what is ahead, said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York.

But the policy committee does "want to keep gradually raising rates (without) killing the economy in the process. That's the big focus," he said. "We do expect them to catch up in December."

The US central bank raised rates in September for the first time in three years to combat higher inflation. Oil prices, which were lower on Monday, have risen sharply since the start of US-Israeli war with Iran, fueling inflation concerns and a rise in Treasury yields, until recently.

Market expectations for a rate increase from the Fed this week have fallen recently as yields have eased and economic data has been mixed. As of Monday, rate futures were pricing in about a 90% chance of a hold on rates at the Fed's meeting this week, data showed. At the same time, they were pricing in a roughly 80% chance of some type of hike in December.

With the Fed likely to keep rates unchanged this week, investors may focus again on what AI-related companies say in earnings reports about future spending and the economic outlook, said Jim Barnes, director of fixed income at Bryn Mawr Trust.

"That's starting to have an influence on investors' expectations for bond yields going forward," he said.

Meta Platforms META.O became the center of the selloff in stocks last week after the operator of social media networks and major AI investor said in its earnings report that it would create a new class of shares in part to raise money for further capital spending, which investors took as evidence that the next leg of the AI buildout will be costly for shareholders.

Meta said on Monday it plans to raise up to $95 billion in equity to fund its AI-related expansion of data centers, cloud computing power and other infrastructure. Its shares were last off 0.4%.

The market is "going to play off that theme for this week" and watch whether yields continue to fall, Barnes said.

Yields on 2-year Treasuries extended their rise in afternoon trading following soft demand in an auction of 2-year Treasury notes.

The yield on the benchmark US 10-year Treasury note was last unchanged at 4.988%. The yield on the 30-year bond was down 1.5 bps at 5.3%.

The 2-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, was up 3.2 bps at 4.714%.

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 27.2 basis points.

The spread narrowed to its flattest in about a month.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.454% after closing at 2.465% last week.

The 10-year TIPS breakeven rate was last at 2.341%, indicating the market sees inflation averaging about 2.3% a year for the next decade.