TREASURIES-US yields skid to multi-week lows as DeepSeek fear triggers safety flows

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US 10-year, 20-year, 30-year bond yields hit four-week lows

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US two-year yields fall to lowest in seven weeks

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US rate futures price in two cuts in 2025

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US two-year, five-year auctions show solid results

(Adds comment, auction results; updates prices, graphic)

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 27 (Reuters) - U.S. Treasury yields tumbled to multi-week lows on Monday, tracking steep declines in equities, as investors sought the safety of government bonds, with tech stocks sinking on the emergence of a Chinese discount artificial intelligence model.

A solid auction of U.S. five-year notes added more bids to Treasuries, further pushing yields lower.

The benchmark 10-year Treasury yield fell to a four-week low and was last down 9.5 basis points at 4.534%, on track for the biggest one-day fall in nearly two weeks. Both 20- and 30-year bond yields also slid to four-week troughs.

The two-year yield, which is typically tied to Federal Reserve policy expectations, fell to its lowest in seven weeks and was last down 7.5 bps at 4.197%. The three-, five-, and seven-year yields all slid to six-week lows.

Bonds rose as tech stocks, in particular, fell around the world. The popularity of a Chinese discount artificial intelligence model DeepSeek jolted investors' faith in the profitability of AI and the sector's voracious demand for high-tech chips.

Wall Street indexes fell in afternoon trading, with the Nasdaq down 3.6% on the day. AI giant Nvidia sank 17.3% on Monday to $117.96.

"The DeepSeek news has caused a flight to safety in U.S. financial markets," said Will Compernolle, macro strategist, at FHN Financial in New York. However, its impact is already fading as the Fed's policy-setting meeting on Wednesday approaches, he noted.

YIELD CURVE FLATTENS

The U.S. Treasury yield curve flattened or became less steep, reflecting a so-called bull flattening scenario in which long-term interest rates are falling faster than shorter-dated ones due to a flight to safety. The gap between two-year and 10-year Treasury yields narrowed to 33.3 bps, compared with 35.1 late Friday.

Also on Monday, the U.S. Treasury auctioned $69 billion in two-year notes and $70 billion in five-year debt. The five-year sale showed solid results, while stats from the two-year auction were slightly weaker.

The two-year note auction was priced at

4.211%

, as expected at the bid deadline. However, the bid-to-cover ratio, a demand metric, was 2.66, compared with a 2.68 average. Dealers took 13.7% of supply, up from the 12% average, which suggested that this market segment had to step in to make up for soft demand overall.

The weak appetite for the two-year was understandable given how much Treasury prices have gone up going into the auction, analysts said.

The five-year note sale cleared at a high yield of

4.330%

, below the expected rate at the bid deadline. This reflected healthy demand, with investors willing to absorb a lower-than-forecast rate.

There were $167.7 billion in bids for a bid-to-cover ratio of 2.40, unchanged from last month, and marginally higher than the 2.38 average.

The market is eyeing the Fed's interest rate decision at the end of Wednesday's Federal Open Market Committee meeting. It is widely expected to keep its benchmark overnight interest rate in the 4.25%-4.50% range, in what market participants described as a "dovish pause."

"The Fed is not going to act without knowing policies from the new administration," said Vincent Reinhart, chief economist at BNY Investments.

"They're in an awkward position about providing guidance. They can't explain forecasts that depend on certain government policies."

With the latest sell-off in stocks, the U.S. rate futures market has priced 51 bps in cuts this year, or two rate reductions of 25 bps each, up from 36 bps late on Friday, according to LSEG calculations. The rates market for most of this month had priced in just one rate easing.