Forecast Trend Report by Period
The US Treasury market is extending its rebound as the artificial intelligence investment boom cools and the outcome of the midterm elections lends fresh support to bonds.
Bloomberg reported on November 8 that Wall Street sees the recent correction in AI-related stocks and Democratic control of both chambers of Congress as new drivers for Treasury gains. A slowdown in AI investment could ease pressure on growth and inflation. It could also constrain the Trump administration's ability to expand fiscal spending.
Heavy investment in AI infrastructure had supported US economic growth and inflation while also fueling corporate bond issuance. But a sharp correction in AI-related technology stocks has prompted speculation that the pace of investment could slow. That would reduce pressure from future bond supply and rising yields.
The midterm election result is also seen as supportive for the Treasury market. With Democrats controlling both the Senate and the House, President Donald Trump's plans for additional tax cuts and higher fiscal spending stand a greater chance of being constrained in Congress. That has raised expectations that pressure from Treasury issuance may ease somewhat, with the US annual fiscal deficit at about $2 trillion, or 6% of gross domestic product.
Falling oil prices, helped by easing tensions between the US and Iran, also supported the bond market. Against that backdrop, the 10-year Treasury yield recently fell to around 4.8%, more than 0.5 percentage point below its peak in early October. The bond market held on to most of its weekly gains even after stronger-than-expected US employment data last week.
Scott DiMaggio, head of fixed income at AllianceBernstein, said AI has been the biggest contributor to nominal GDP growth. Any disruption to AI investment could be positive for the Treasury market.
John Briggs, head of North America rates strategy at Natixis, was more cautious. If the sharp stock-market decline does not persist, the recent drop in Treasury yields may have come too quickly, he said.
Still, the possibility of another interest-rate increase by the Federal Reserve remains an overhang for Treasuries. Markets expect rate hikes to resume next month as inflation remains above the Fed's 2% target. The US October consumer price index, due on November 10, and Treasury auctions scheduled for this week are key factors that could shape the next move in yields.
Neil Sutherland, a portfolio manager at Schroders, said bonds currently offer attractive value. He said a more favorable backdrop for the Treasury market could emerge over the next six to 12 months as the main uncertainties that have weighed on markets begin to clear.
Suehyeon Lee
