Risk aversion outweighs inflation concerns, US and European government bonds rise across the board, US Treasury yields plunge more than 10 basis points intraday

Rising risk aversion has outweighed inflation concerns, leading to a broad rally in U.S. and European bonds on Thursday, October 15, with yields on both the benchmark 10-year U.S. Treasury and the rate-sensitive 2-year U.S. Treasury plunging more than 10 basis points intraday. Yields on medium- and long-term government bonds in major European economies such as the UK, Germany, and France also fell simultaneously, ushering in a round of recovery in the global bond market.

The U.S. September Producer Price Index (PPI), released during European equity trading hours on Thursday, posted the fastest month-on-month increase in over four years, initially intensifying market concerns about further Fed rate hikes. However, as financing risks for AI-related firms rose and tech stocks came under pressure, investors began to re-evaluate the impact of high interest rates on economic growth and corporate debt servicing capacity, with risk aversion driving funds into government bonds.

Media reports noted that the market is shifting focus from inflation worries to the impact of high financing costs on economic growth. Meanwhile, credit risks for AI-related firms like CoreWeave are being closely watched, and the divergent performance between corporate and government bonds further highlights the market’s reassessment of asset-specific risks.

10-Year U.S. Treasury Yield Falls for Three Straight Sessions, Intraday Lows of 5.04%; Broad Rally in U.S. and European Long-Term Bonds

Buying was notably stronger in the U.S. Treasury market on Thursday, with the 10-year yield sinking intraday to around 5.04%, down about 15 basis points on the day, marking its lowest level since September 23 and its third consecutive session of decline. The 30-year U.S. Treasury yield also dropped sharply, falling about 12 basis points intraday.

The 2-year U.S. Treasury yield, which is more sensitive to monetary policy outlook, fell below 4.69% during early U.S. trading hours on Thursday, hitting the lowest level since September 18, and declined by more than 10 basis points, reversing a rebound seen on Wednesday.

European and U.S. long-term bonds rallied in tandem. By the close of European trading, the UK 10-year government bond yield fell 5.4 basis points to 5.371%; the 30-year gilt yield dropped 6.4 basis points, and the 2-year yield decreased by 2.1 basis points.

At the close of European trading, the German 10-year government bond yield dropped 5.3 basis points to 3.413%; the 30-year Bund yield fell by 5.3 basis points, and the 2-year yield slid 1.7 basis points.

French government bonds outperformed, with the 10-year OAT yield dropping 8.5 basis points to 4.796% by the close; the 30-year yield fell 8 basis points and the 2-year yield fell 3 basis points.

Overall, long-end yields in U.S. and European bond markets broadly declined, with long-term bonds in multiple markets falling by more than short-term ones. The significant retreat in U.S. Treasury yields, along with strength in long-end government bonds of major European economies, reflects investors’ renewed evaluation of the interplay between inflation, growth, and financial market risks.

Inflation Data Remains Hot, But Markets Now Worry About the Cost of Growth Under High Rates

The key to this round of Treasury rallies lies in the market’s new balancing of inflation and interest rate outlooks.

The fastest U.S. PPI growth in over four years indicates that upstream price pressures remain evident. Following previous inflation data coming in above expectations, the market temporarily raised bets on further Fed hikes, putting pressure on Treasury yields.

Nonetheless, elevated inflation did not halt the rebound in bond prices on Thursday. As the market began to re-examine the impact of high financing costs on corporate investment, consumption, and economic growth, investors increased their allocation to relatively safe assets such as Treasuries.

The Wall Street Journal noted that earlier investor worries about persistent high inflation are now shifting towards greater concern about the potential drag of high borrowing costs on economic growth. The German 10-year Bund yield also hit weekly lows, showing that this repricing is not limited to the U.S. market.

This does not mean that the market believes inflation risks have disappeared or that the risk of further Fed rate hikes is off the table. More accurately, investors are weighing two risks: on the one hand, persistent price pressures may force the Fed to keep tight policy; on the other, high rates could increasingly weigh on economic activity via financing costs, corporate cash flows, and shifts in financial market risk appetite.

Rising AI Credit Risks: Government Bond Rally Persists Amid Rising Corporate Financing Costs

In addition to macroeconomic factors, the concentrated exposure of financing risks in the AI sector chain also became a market highlight on Thursday.

Recently, AI cloud service provider CoreWeave saw both its stocks and bonds sold off, with financing costs surging. Yields on some of the company’s bonds have risen to over 15%–16%, and its 5-year credit default swap (CDS) spread hit a record high intraday, reflecting heightened market worries about its ability to service debt.

The risk is not confined to CoreWeave alone. Oracle’s 5-year CDS spread reached 288 basis points intraday, up 28 points from a week ago; Softbank’s 5-year CDS spread rose 24 basis points in one day to 424. Related spreads for major tech names—including Amazon, Alphabet, and Meta—also hit record highs.

Some media have linked the recent decline in U.S. Treasury yields with the surge in financing costs for AI-related businesses, noting that pressure in technology stocks and AI infrastructure areas is pushing money into safe-haven assets such as Treasuries.

This also explains why government bond yields can fall sharply even with hot inflation data. Normally, rising inflation would push up rate expectations and pressure government bonds; but when credit risk and stock market volatility increase significantly, risk aversion can temporarily outweigh inflation concerns, sending bond prices higher.

However, the divergence between government and corporate bonds is also noteworthy. Falling government yields do not mean financing costs drop for all borrowers. For AI companies with weaker credit profiles and heavy reliance on continuous borrowing for expansion, a widening credit spread could still keep their actual funding costs elevated, even as risk-free rates fall.

Will the Bond Market Rally Last? The Tug-of-War Between Inflation and Growth Risks Remains Key

The global bond market rebound on Thursday reflects a shift in trading logic: with inflation pressures not yet unleashed, investors are paying closer attention to the effects of high financing costs on economic growth, corporate debt sustainability, and financial market stability.

If subsequent inflation data continues to run hot, the Fed may need to keep monetary policy tighter, or even hike rates further, which would again put upward pressure on Treasury yields. Conversely, if credit risks continue to spread, impeding corporate financing and investment, demand for safe-haven government bonds may remain robust.

The most notable current divergence is that yields on government bonds are retreating even as credit financing costs for some AI firms are rising. The former reflects changes in risk-free rates and the demand for safety, while the latter highlights the market’s repricing of specific firms’ debt service capacities and business models.

For the bond market, the next focus is to monitor if U.S. inflation can cool, whether economic growth shows clearer weakening signs, and if AI infrastructure investments can deliver on expected returns. Until these signals become more pronounced, the sharp drop in government bond yields looks more like the market rebalancing between inflation and growth risks, rather than a sign that inflation threats have been resolved.