Treasury yields drop below 5% and the Nasdaq loses more than 2.5% as investors turn defensive

The Nasdaq fell more than 2.5% on 22 October as lacklustre earnings reports sparked worries about an AI slowdown¹. Investors are increasingly unsure about the return prospects of the massive investments behind the technology¹. Sharply lower yields gave a modest lift to the Dow and the Russell indexes even as technology shares slid¹.

US bond yields plunged as fears about sustaining the AI boom resurfaced, and the 10-year yield dipped below 5%⁵. Yields sank below that level as investors looked for safety, in a move framed as “AI is on trial”⁴. Municipal bonds and Treasuries rallied together in a flight to quality⁶.

The shift came before the US open. Late on the previous afternoon, equity futures were holding gains after well-received earnings, but by early morning both equity index futures and bond yields were sharply lower². Global investors were aggressively de-risking their portfolios². Yields had already dipped on 21 October as AI risk was weighed, before moving off their lows after an auction⁸.

Why it matters to investors

Two separate pressures hit risk appetite at once. Stocks fell and oil rose as investors retreated from mounting risks, including attacks on shipping around the Strait of Hormuz, where a Kuwait-flagged crude oil tanker was struck on Wednesday³. In technology, Nvidia chief executive Jensen Huang’s warning that a “scarcity of capital” is slowing the rollout of artificial intelligence triggered a sell-off⁷.

The fall in long-term yields also delivered something official policy had struggled to achieve. Treasury Secretary Scott Bessent had little success trying to coax long-dated government bond yields lower by increasing buybacks of those bonds⁴. A flight to safety, rather than Treasury action, pushed the 10-year yield below 5%^4,5.

The bond rally had limits outside the United States. In Canada, market players were largely positioned for a Bank of Canada rate rise next week, which limited the dip in yields⁵.

What to watch

The immediate question is whether the haven bid in Treasuries and municipal bonds holds^5,6. The day’s equity losses were driven by doubts about the return on AI investment, so further earnings reports and comments from AI suppliers on the availability of capital are the main tests^1,7.

Shipping attacks near Hormuz and their effect on oil prices remain a second source of pressure on risk appetite³. In Canada, the Bank of Canada’s decision next week will show whether the rate-rise positioning that held up yields there was justified⁵.