Yields dip with AI growth concerns, Fed in focus

NEW YORK – US Treasury yields edged lower on Monday as traders evaluated whether the Federal Reserve will cut rates next month, with delayed data releases including the closely watched monthly jobs report due this week.

More hawkish commentary from regional Fed officials last week led investors to lower bets on a December rate cut, which fed funds futures traders are now pricing as having only a 39% probability.

Fed Vice Chair Philip Jefferson said on Monday the US central bank needs to “proceed slowly” with any further interest rate cuts as it eases policy toward a level that would likely stop putting downward pressure on inflation.

At the same time, stock and debt investors are focused on how artificial intelligence companies are financing data centers, with concerns growing that these financing structures are less robust than previously thought.

“That’s really influencing what’s going on in the investment-grade credit markets in particular and thereby flowing through back into the broader bond markets,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

“Since AI expansion is such a prominent piece of the current source of economic growth, it’s a material impact. That’s the bear economic case that’s circulating more aggressively right now and helping pull Treasury yields a little bit lower,” he said.

The 2-year note yield, which typically moves in step with Fed rate expectations, was last down 1 basis point at 3.606%. The yield on benchmark US 10-year notes fell 1.7 basis points to 4.131%.

The closely watched yield curve between two- and 10-year notes flattened to 52.3 basis points.

This week’s main US economic focus will be the release on Thursday of the jobs report from September.

JPMorgan expects the report to show that employers added 50,000 jobs during the month, and “while this would be a sequential firming in labor demand, we think it’s enough to support further Fed easing.”

Interest rate strategists led by Phoebe White at the bank say rate cut expectations could maintain lower shorter-dated yields over the coming week. However, it will be more difficult for longer-dated yields to fall.

“We think it’s more challenging for long-end yields to decline significantly from current levels, as valuations and position technicals both should act as a headwind locally,” they said.

Meanwhile the delay in the release of economic reports and issues relating to data collection while the federal government was shut down are likely to damage the quality of releases through the rest of the year.

This will make it more difficult to gauge the strength of the economy as concerns grow about a weakening labor market and Fed officials remain worried about sticky inflation.

“There’s going to be a lot of uncertainty that the next time we’ll have a true real-time collection of jobs data will be the report released in the first week of January,” said LeBas.

White House economic adviser Kevin Hassett said on Thursday the government would release the closely watched employment report for October, but without the jobless rate. The government will also not release inflation data for October.

(Reporting by Karen Brettell; Editing by Alexander Smith and Lisa Shumaker)