Treasuries May Regain Safe-Haven Appeal if AI Trade Unravels — Market Talk
0758 GMT - A deeper correction in artificial intelligence-related equities could restore the diversification appeal of U.S. Treasuries, Julius Baer's fixed-income research analyst Afonso Borges says. While stock-bond correlations have turned positive, an AI-led downturn would resemble a traditional negative demand shock, as weaker capital expenditure, softer hiring and declining household wealth weigh on spending and inflation, he adds. Reduced investment in data centers and related infrastructure could further ease demand for power, equipment and other constrained inputs, he says. Julius Baer recommends an overweight duration stance in intermediate-maturity bonds, noting that Treasuries could regain their defensive role if the AI correction deepens. ([email protected]; @ivy_jiahuihuang)0724 GMT - Bank Negara Malaysia's November meeting is expected to be a "close call" amid expectations for the central bank to raise its policy rate by 25 bps, Barclays economist Brian Tan says in a note. The move to further tighten policy could be delayed until January 2027, he adds. Malaysia's economy grew 5.3% on year in 3Q, slowing from 6.0% in 2Q. However, manufacturing growth accelerated to 7.5% from 7.3%, while weaker mining activity weighed on overall growth. Barclays maintains its 2026 economic growth forecast for Malaysia at an expansion of 5.6%, above the government's revised estimate of 4.8%-5.3% ([email protected])0712 GMT - Yields on eurozone government bonds are steady to slightly lower, helped by lower oil prices. Concerns about the sustainability of debt-funded AI investments have helped weigh on yields and offset recent stronger-than-expected U.S. economic data. However, bond markets have been volatile recently, pulled around by changes in oil prices and risk sentiment, Commerzbank strategists say in a note. "After markets initially rallied on yesterday's risk-off in tech stocks and lower oil, the tides turned in the afternoon with oil rising sharply and bonds starting to sell off." The 10-year German Bund yield is steady at 3.403%, having dropped to 3.352% Thursday, Tradeweb data show. The 10-year French OAT yield falls 0.6 basis points to 4.777%. ([email protected])0655 GMT - U.K. fiscal risks continue to pose a potential headwind to sterling even as encouraging U.K. data boosts expectations for the Bank of England to raise interest rates, Commerzbank's Thu Lan Nguyen says in a note. U.K. growth data exceeded expectations for the fourth consecutive month in August. This resilience gives the BOE room to raise rates, she says. It also takes eases pressure on U.K. Treasury chief John Healey, who remains committed to reducing the deficit ahead of the October 28 budget. "However, given the experience of recent years, some residual risk surrounding the UK's fiscal plans should not be underestimated." The euro falls 0.1% to 0.8440 pounds, having reached a 16-month low of 0.8425 Wednesday, LSEG data show. ([email protected])0634 GMT - Bitcoin stabilizes after reaching a four-week low on Thursday driven by U.S. data boosting expectations for further interest-rate rises by the Federal Reserve. Better-than-expected U.S. retail sales data along with higher-than-expected wholesale inflation data on Thursday further fuelled rate-rise bets after Wednesday's higher-than-expected consumer price inflation figures. A selloff in technology shares due to concerns about the AI trade had also hit risk-sensitive cryptocurrencies, although U.S. and Asian stocks recovered overnight, providing some relief. Bitcoin trades flat at $81,985 after reaching as low as $79,770 on Thursday, LSEG data show. ([email protected])0628 GMT - The dollar falls along with Treasury yields as concerns about the sustainability of debt-funded AI investments weigh. "Over the next three years, the U.S. is expected to spend 2.5%-3% of GDP on capital expenditure and AI infrastructure, which is larger than any infrastructure build out in the U.S. history," Jefferies economist Mohit Kumar says in a note. If the pace of AI build out slows, it would have important consequences for AI companies and the economy, he says. The dollar is also hit by recent comments from Federal Reserve officials, including John Williams and Michelle Bowman, sounding cautious over further interest-rate rises. The DXY dollar index falls 0.1% to 101.944 after hitting a 10-day low of 101.816 overnight. ([email protected])0558 GMT - China's piecemeal stimulus measures remain insufficient relative to the pace of domestic demand weakening, say BofA Global Research economists in a note. However, some recent policies could weigh on growth, at least in the near term, they say. New property policies curbing the presale model, under which developers could sell homes before units are ready for delivery, may hurt new housing starts and investment next year, which would also weigh on local governments' revenue from land sales and overall growth. A credible policy pivot combining stronger fiscal support, more decisive monetary easing and measures to boost consumption and investment, is needed to reverse expectations and support a durable recovery in domestic demand, BofA says. ([email protected]; @ivy_jiahuihuang)0553 GMT - The U.S. 10-year Treasury yield shows a rising risk of a deeper pullback on the weekly chart, says Quek Ser Leang of UOB Global Economics & Markets Research in a note. Last week's pullback has continued and is gathering momentum this week, the senior technical strategist notes. Although this week has yet to conclude, the 10-year yield is on course for its largest weekly drop since late July. Also, the weekly relative strength index is unwinding swiftly from overbought levels. A break below 5.021% could lead to a fall toward the 21-week exponential moving average, which is now near 4.81%, the strategist adds. The U.S. 10-year Treasury yield is little changed at 5.0863%, FactSet data show. ([email protected])0543 GMT - U.S. Treasury yields may have reached levels where their elevated levels weigh on risk sentiment, SEB's Jussi Hiljanen says. The sharp rise in short-dated Treasury yields coupled with a decline in long-dated ones after Wednesday's September consumer-price inflation print suggest that risk sentiment is fragile, the chief rates strategist says. This, in turn, helps cap the upside in Treasury yields, the chief rates strategist says. "The coming days will be important in determining whether the move triggers a continued short-covering rally," he says. ([email protected])0530 GMT - Inflation remains the pivotal variable because it will influence both the direction of monetary policy and the path of government bond yields, Payden & Rygel's Laura Lake and Tim Crawmer say in a note. "If inflation cools more decisively, bonds could deliver price appreciation in addition to income," the senior strategists say. With inflation proving persistent and the possibility of further Fed rate increases, near-term returns may depend more heavily on carry, they add. Payden & Rygel, which prefers a "measured duration position rather than a heroic one," reckons that shorter-duration spread assets can generate incremental income and may help offset some weakness in government bonds if rates remain volatile. ([email protected])0528 GMT - Payden & Rygel's exposure within U.S. fixed income has increasingly shifted toward the front end of the yield curve, senior strategists Laura Lake and Tim Crawmer say in a note. "Attractive starting yields, substantial tightening already reflected in prices, and greater sensitivity to any eventual change in Federal Reserve policy create a compelling combination," they say. More broadly, Payden & Rygel remains constructive on fixed income and credit spread risk, they say. ([email protected])0521 GMT - Investors are being paid to own bonds again, Payden & Rygel's Laura Lake and Tim Crawmer say in a note. "All-in yields are attractive, corporate fundamentals remain broadly sound and demand for fixed income is robust," the senior strategists say. That gives investors a meaningful source of income while they wait for greater clarity on inflation and interest rates, they say. There is also the potential for more than income. If inflation moderates and government bond yields move lower, investors could benefit from capital appreciation as well, they add. "We do not expect the path to be smooth, but the starting yield provides a much better cushion than investors had during the long low-rate era." ([email protected])