US Treasuries Surge as Tech Sell-Off Sours Risk Appetite
US Treasuries experienced a significant rally on Monday, driven by a surge in investors seeking safe-haven assets amidst a wider market decline in tech stocks.
10-Year Treasury Yield at Lowest Since January
The yield on 10-year US bonds significantly declined, reaching as low as 4.52%, marking the lowest level since January 2. This decline coincided with a surge in haven currencies, including the yen and the Swiss franc, which increased by more than 0.5%.
Artificial Intelligence Model Sparks Market Jitters
Global markets were rattled by news of a new artificial intelligence model developed by Chinese startup DeepSeek, raising concerns about US technological dominance and potentially driving down sky-high tech valuations.
Correlation between Rates and Equities Returns
Pooja Kumra, senior UK and European rates strategist at Toronto-Dominion Bank, noted a return of correlation between interest rates and equity performance. The gains in bonds and haven currencies occurred amidst an expected week of market volatility, with the Federal Reserve's upcoming monetary policy announcement on Wednesday and ongoing tariff talks remaining in focus.
Uncertainty Surrounds Trump's Tariffs
The ongoing trade dispute between the US and Colombia continues to cast uncertainty, with investors incorporating a premium for volatility into their pricing.
Safe-Haven Assets Gain in Demand
The Japanese yen and the Swiss franc experienced a rally as investors sought refuge in safe-haven currencies. The yen strengthened by 1.3% to 153.98 per dollar, its highest level in over five weeks, while the Swiss franc rose by 0.7% to 0.8999 per dollar.
European Bonds Benefit from Risk-Off Sentiment
European bonds also benefited from the risk-averse market sentiment, with the German 10-year yield dropping seven basis points to 2.50%. Debt issuances from Italy, France, and the UK also gained value.
Market Pricing in Rate Cuts
Swaps indicated increased expectations of interest rate cuts by the Federal Reserve and the European Central Bank ahead of their policy meetings later this week.
Fed Expected to Hold Steady This Week
Despite market expectations, Fed officials are widely expected to maintain interest rates at their current levels this week due to lingering concerns about above-target inflation and Trump's unpredictable economic policies.
Uncertainty and Growth Prospects
Lauren van Biljon, portfolio manager at Allspring Global Investments, emphasized the lack of clarity surrounding the economic outlook, with policy uncertainty remaining a significant driver of growth and inflation both domestically and globally.
Yields May Decline Further
Pacific Investment Management Co. and Morgan Stanley strategists predict that the Fed's upcoming policy decision could trigger a further decline in US Treasury yields.