The 10-year yield fell to 5%, and it was not cooler inflation

The 10-year Treasury yield fell 9 basis points this week, to 5%. Of that decline, 8 basis points were the real yield, what is left of a Treasury yield once compensation for inflation is taken out. It ended at 2.66%.

The 10-year breakeven, that compensation, is the gap between the ordinary Treasury yield and the yield on inflation-protected Treasuries. It fell 1 basis point, to 2.34%, and that 1 basis point is the rest of the decline.

The yield closed the prior Friday at 5.09%. It was 5.15% on Monday and 5.13% on Wednesday. On Thursday, Oct. 22, it fell 17 basis points, to 4.96%, which CNBC reported as the lowest level in nearly a month. Friday it closed at 5%.

Yields fell along the curve, by 5 basis points at the two-year, to 4.69%, and by 10 basis points at the 30-year, to 5.33%.

The gap between the two-year and the 10-year narrowed by 4 basis points, to 31. Long yields fell a little more than short ones. A steepening would have meant the opposite, long yields falling less.

The five-year breakeven rose 11 basis points, to 2.48%, while the five-year real yield fell 18 basis points. The ordinary five-year yield still fell, by 7 basis points, to 4.82%, because the real yield fell by more than the breakeven rose.

BlackRock's iShares 20+ Year Treasury Bond ETF BTLT rose 1.9% on Thursday and finished the week up 1.6%. BlackRock's iShares TIPS Bond ETF BTIP rose 0.7%.

Thursday's damage was the artificial-intelligence trade

Meta Platforms fell nearly 7% on Thursday as free cash flow turned negative and the company raised the floor of its capital-spending forecast, CNBC reported. Yahoo Finance put the new floor at $135 billion, up from $130 billion, in a range running to $145 billion. Meta is not a chipmaker.

Its sector fund, the State Street Communication Services Select Sector SPDR ETF AXLC, fell 4.4% on the week, with a further drop on Friday. The VanEck Semiconductor ETF ASMH fell 6% on Thursday and finished the week down 2.3%.

The State Street Technology Select Sector SPDR ETF AXLK fell 3.3% on Thursday and ended the week down 0.1%, so the Thursday drop in broader technology did not hold.

BlackRock's iShares Russell 2000 ETF AIWM rose 2% on the week. That gain was in by Wednesday. The fund was flat on Thursday and slipped on Friday.

The S&P 500 fell 0.5% on the week and the Nasdaq-100 fell 0.8%. The Dow Jones Industrial Average rose 0.4%.

CNBC reported that investors turned to Treasuries on Thursday amid a stock selloff it tied to the artificial-intelligence trade, and amid higher oil prices. Reuters said Meta's results had reignited worries about artificial-intelligence spending, and that the drop in stocks sent investors to the safety of Treasuries.

J.P. Morgan Asset Management wrote on Oct. 22 that duration, how much a bond's price moves when yields change, had reasserted itself as a hedge against risk in the artificial-intelligence trade.

On Thursday the ICE BofA U.S. High Yield Index option-adjusted spread widened 13 basis points, to 3.40%, from 3.27% a day earlier. It was 3.31% on Oct. 16. BlackRock's iShares iBoxx $ High Yield Corporate Bond ETF BHYG rose 0.2% on the week anyway.

A high-yield bond's yield is a Treasury yield plus that spread, and the 10-year fell 17 basis points that day, so the extra yield over government debt did not erase the drop in the Treasury yield.

Oil rose, and gold fell the same day real yields did

Brent crude rose 6.2% on the week, to $116.72, after slipping into Wednesday. It then rose 4% on Thursday and 3.1% on Friday. Reuters reported Friday's settlement as the highest since April 29.

"Fears of supply disruptions drove the advance after Iranian-backed Houthi rebels carried out a series of attacks across Saudi Arabia, including on energy infrastructure," Adam Turnquist, chief cross-asset strategist at LPL Financial, told Reuters.

USCF's United States Oil Fund, LP BUSO, which holds near-term West Texas Intermediate futures, rose 4.8%, short of Brent's 6.2%. Most of the fund's gain was Friday, when it rose 4.3%. The State Street Energy Select Sector SPDR ETF AXLE fell 0.9% on Thursday, the day Treasuries rallied, and rose 2.6% on Friday, finishing the week up 1.6%.

Gold futures settled at $4,007.90, down 4.1% on the week. SPDR Gold Shares BGLD fell 4%. On Thursday, when the 10-year real yield fell 12 basis points, to 2.64%, the fund fell 2.6%, its largest drop of the week.

A lower real yield cuts the opportunity cost of holding gold, which pays no interest, and gold fell anyway. Reuters, writing Friday, said the metal was heading for its worst week since June, and tied the drop to rising oil prices and to bets on a rate hike.

Futures price a hold next week and a hike in December

The Federal Reserve meets Oct. 27-28 with the target range for the federal funds rate at 3.75% to 4%, where it set the range on Sept. 16. Reuters, citing CME's FedWatch tool, reported Friday a 92% chance of no change at that meeting and a 78% chance of a hike in December.

Friday morning, after Thursday's rally, S&P Global's flash reading put the composite output index at 57.6, down from 58.4 in September, which the firm called firmly in strong growth territory. Selling prices across goods and services rose at the fastest pace since August 2022.

"October's flash PMI data indicate that the US economy continues to boom at the start of the fourth quarter," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The real yield fell anyway, against those hotter selling prices, on the day longer Treasuries rose with the artificial-intelligence selloff. J.P. Morgan Asset Management called that a hedge. Gold fell 2.6% that same day.

A lower real yield and a lower gold price are not the same bet, and the futures save the hike for December rather than for the meeting next week.