10-Year Treasury Yield Posts Largest One-Day Drop Since March 2023 as AI Credit Stress Drives Safety Bid

The 10-year U.S. Treasury yield fell sharply below 5% on Thursday, touching its lowest level in nearly a month as investors fled into government bonds to hedge against mounting stress in AI-linked credit markets. The benchmark yield dropped roughly 18 basis points to 4.965%, its steepest single-session decline since March 2023, while the 7-year yield fell more than 20 basis points at its intraday low and the 5-year yield shed 15 basis points to 4.80%.

The flight to safety was driven by what analysts and market observers are calling a stress test for AI-era financing. Credit default swap spreads on AI hyperscalers, including Oracle, widened to record levels, reflecting rising concerns about the credit risk tied to intensive infrastructure buildouts and deteriorating cash flows. Investment-grade corporate bond yields have surged to decade highs, and junk bond markets are flashing broader alarm signals beyond just the hyperscaler cohort.

SpaceX's $40 billion debt raise, being finalized this week, is pricing at sharply higher interest rates than when the company last tapped bondholders, underscoring the tightening conditions facing AI-adjacent borrowers. French sovereign bonds are also facing a simultaneous stress test alongside AI debt, with CNBC noting that further pressure may not be over. Treasury yield volatility surged across the curve, with options skew moving sharply lower and convexity rising, signaling elevated demand for protection against both lower yields and extreme dislocations.

On the demand side, investor flows showed investment funds increasing purchases of 3-year notes to $45.499 billion from $43.063 billion in the prior period and of 30-year bonds to $14.572 billion from $12.001 billion, while foreign buying of both instruments declined. The 5-year TIPS auction cleared at a high yield of 2.367%, well above the prior reading of 1.955%, reflecting the scale of the real-yield repricing underway.