• American Century Investments argues that the 10-year Treasury yield at 5.25% presents a buying opportunity, but warns that the AI-driven credit boom is intensifying competition for capital and pressuring long-term yields.
  • The firm cautions that market pricing for up to four Fed rate hikes over the coming year may be overly aggressive, while cracks are emerging in lower-tier credit, particularly CCC-rated corporate bonds.
  • Recent market action shows yields briefly spiking above 5.34% before retreating as buyers stepped in, underscoring the tension between attractive valuations and rising risks.

A Strategic Entry Point?

American Century Investments is making a case for buying long-dated Treasuries, even as yields hover near multi-decade highs. The Kansas City-based asset manager, which oversees more than $350 billion in assets under supervision, believes the 10-year Treasury yield at 5.25% offers compelling value for investors willing to look past near-term volatility. The firm’s fixed-income CIO, Charles Tan, points to a simple calculus: with yields at these levels, the income component alone can drive returns if expectations for aggressive Fed tightening prove overdone.

But American Century’s optimism comes with a caveat. The firm warns that a massive wave of AI-related borrowing—hyperscalers issuing debt to fund data centers, power infrastructure, and computing capacity—is soaking up longer-duration capital and keeping upward pressure on Treasury yields. This competition for financing, Tan argues, is a major factor behind the recent spike in government-bond yields, even as expectations for an immediate Fed hike have eased.

Credit Cracks and Fed Expectations

Market participants got a taste of both dynamics this week. On October 5, the 10-year Treasury yield briefly touched 5.349%, its highest level since April 2002, before settling around 5.307%, according to CNBC (VSNT). The 30-year yield also pierced 5.70% intraday. Yet just days earlier, a global bond selloff had pushed the 10-year to 5.34%, only to see buyers return and drive yields back toward 5.26%. That rebound suggests demand remains sensitive to price, but it also highlights how quickly sentiment can shift.

Meanwhile, the Fed’s next move is far from certain. Following a weaker-than-expected September jobs report, traders priced in an 82% probability that the central bank would hold rates steady at its next meeting, according to CME (CME) FedWatch data cited in October 5 reporting. That’s a sharp reversal from earlier expectations, which had leaned toward another hike. American Century says the market is now overly aggressive in pricing up to four additional rate increases over the coming year, arguing that the cumulative effect of past tightening has yet to fully work through the economy.

Still, not all signals are benign. A junk-bond credit-default-swap index reached its highest level since early April on October 1, a sign that investors are growing more concerned about speculative-grade borrowers. American Century specifically flags cracks in lower-tier credit, notably CCC-rated corporate bonds, where refinancing risks are mounting as borrowing costs stay elevated. The firm declined to provide exact figures on CCC spreads, and its specific “buyers’ strike” language could not be independently verified. But the broader trend—rising default protection costs and wider spreads for the weakest issuers—is well documented.

The AI Financing Juggernaut

The role of AI in the bond market is a relatively new variable. According to ING (ING) strategists, AI-related investment explains roughly one-fifth of the recent rise in long-dated yields, with most of that contribution coming from expectations of stronger productivity and growth rather than corporate debt issuance alone. That’s an important distinction. If AI spending boosts economic capacity, it could justify higher rates without stoking inflation. But if the financing outpaces realizable earnings, the risk of a buyers’ strike—where investors refuse to lend on current terms—grows more tangible.

American Century’s view is not universally shared. Citi (C)’s Scott Chronert has suggested the Fed’s next move could be a cut, not a hike, while others argue that AI’s productivity benefits will take years to materialize. The firm’s own outlook acknowledges this uncertainty, framing its call as a valuation judgment rather than a prediction that yields cannot rise further.

For now, the bond market remains a tug-of-war between attractive yields and growing risks. The Fed’s September meeting minutes, due October 7, could provide fresh clues on the policy path. Inflation data, energy prices, and the pace of AI-related debt issuance will all shape whether American Century’s buying opportunity proves prescient—or premature.