Key Highlights

  • The 10-year yield fell to around 5.08% on Thursday as a tech and AI selloff boosted demand for Treasuries.
  • Yields had earlier hit multi-decade highs, near 5.10% to 5.12% this month versus 3.97% before the Iran conflict.
  • September pending home sales fell 7.3% to a record low; housing starts fell 5.2%.
  • Markets still price a quarter-point Fed hike in December despite an expected hold next week.

The yield on the U.S. 10-year Treasury note fell to around 5.08% on Thursday, extending its recent decline as a selloff in technology and artificial-intelligence stocks boosted demand for the safety of government bonds.

The move follows a violent rise in borrowing costs. The 10-year yield reached multi-decade highs this month, about 5.10% on Oct. 15 according to the Associated Press, compared with 3.97% before the U.S.-Iran conflict began. The two-year yield was near 4.77% to 4.79%.

Why Yields Eased

Two forces drove the dip. The first was equities: after Tesla, IBM and Lam Research fell on results, Nasdaq 100 futures were down about 1.6% and S&P 500 futures about 0.9%, and investors moved money into Treasuries. The second was value-seeking. The recent selloff in Treasuries, which had pushed yields to multi-decade highs, eased as investors stepped in to buy the dip.

Housing Is Cracking

Economic data point to a slowdown. The National Association of Realtors said pending home sales fell 7.3% in September to 66.0, the lowest since the series began in 2001. Economists polled by Reuters had forecast a 0.5% decline. Contracts fell in all four regions.

Housing starts dropped 5.2% to a seasonally adjusted annual rate of 1.221 million, well below the 1.300 million consensus, according to the Census Bureau. Single-family starts fell 4.6% to 859,000, the lowest in a year. Freddie Mac said the 30-year fixed mortgage rate averaged 7.40% last week, the highest in nearly three years.

“Market conditions weakened in September due to fast-rising mortgage rates,” NAR Chief Economist Lawrence Yun said.

Builders are feeling it too. Homebuilder sentiment hit a 14-year low, according to CNBC, and 43% of builders have cut prices by an average of 6%, according to 24/7 Wall St., which erodes margins at a time when buyers are already stretched.

The Fed Is Boxed In

Weak housing hasn’t changed the Federal Reserve’s focus on inflation. The central bank raised rates in September for the first time since 2023 and is widely expected to hold at its Oct. 27-28 meeting. Chair Kevin Warsh’s remarks last Friday did little to alter that view. Markets still price about a 90% chance of a quarter-point increase in December, according to CME’s FedWatch tool, because energy-driven inflation persists.

Oil is the culprit. Brent crude rose toward $112 a barrel on Thursday after attacks on Saudi facilities, a U.S. order for non-emergency staff to leave Saudi Arabia, and reports of planned strikes on Iran after the Nov. 3 midterms.

A Global Bond Backdrop

The pressure on bonds is global. UK gilt yields have reached 19-year highs this autumn before easing, and the UK 10-year was just below 5.4% on Thursday after inflation unexpectedly accelerated to 3.5%. Higher yields abroad have kept pressure on U.S. Treasuries.

What to Watch

The Fed decision on Oct. 28 and Warsh’s press conference are the main events, followed by data on inflation and the labor market. A fall in oil would help bonds. A further escalation in the Gulf, or evidence that the AI selloff is a one-day event, could send yields back toward their highs. Housing will be a gauge of how much damage borrowing costs are doing to the real economy.

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