Investors are flocking back to bonds for safety as DeepSeek sends risks spiraling

• The 10-year Treasury yield hit its lowest level of the year as stocks plunged on Monday.
• Fears of a new AI tool from China are sending investors to safe havens.
• The Fed's policy meeting this week is also likely to impact the bond market.

China's DeepSeek artificial intelligence tool ignited a panic on Wall Street on Monday, sparking a race for safety as investors assessed fresh risks to tech-sector dominance.

US Treasury yields fell steeply as investors fled to safe-haven trades, seeking shelter from the massive fall in stock prices. The benchmark 10-year Treasury rate dropped as much as 10 basis points to 4.5% early Monday, marking its lowest level this year.

"This suggests that investors are putting the proceeds of dumped stocks straight into the bond market for now. It could also imply that equities could have more downside, given opportunists don't appear to be in any rush to buy at cheaper levels," David Morrison, senior market analyst at Trade Nation, said in written commentary.

US stocks are weathering major fallout after Chinese startup DeepSeek unveiled an artificial intelligence tool that's outperforming US rivals. The debut of the new AI has shaken confidence in US mega-cap tech stocks, which have been the dominant engine of US stock gains in the last two years.

Specifically, DeepSeek's AI tool, which is cheaper and trained on less costly chip tech than rivals' models, has stirred up questions as to why Silicon Valley is spending hundreds of billions to develop its own AI projects. Investors may also feel the bot is a threat to US mega-cap valuations, which have soared to sky-high levels over the past year.

With the market now reassessing risks to the two-year-old bull rally, investors appear to be taking money that they've pulled from tech stocks and other names that have benefited from the AI boom and parking some of it in bonds.

Monday's steep drop in yields highlights a considerable turnaround from the bond market's trajectory earlier this month.

Worries about US debt, interest rates, and inflation under President Donald Trump set the stage for a bond sell-off in the early days of 2025. By mid-January, the 10-year yield reached 4.8%, closing in on a level that has historically triggered a stock market correction.

What happens next for bond yields depends on how long the equity meltdown lasts, ING said.

"Treasuries can show a meaningful reaction lower in yields from here should there be a multi-week reaction to the downside for stocks or at least a 10% fall in broad indices. So far, we're on a one-day move, so that's still to be seen," the firm wrote.

A downside shift in US interest rate expectations — which could stem from improved inflation optimism and revisions to payrolls data next week — could also push bond yields lower, ING said.

Rate projections will likely be recalibrated again following the Federal Reserve's policy decision and commentary from Fed chair Jerome Powell on Wednesday.

According to CME FedWatch Tool data, markets see a 99.5% chance the Fed will leave rates unchanged this week. After the decision, investors can also watch for December's personal consumption expenditures index to come out Friday.