Brittle bonds and AI boom face off

This week kicked off with a fresh surge in sovereign bond yields around the world as the Iran energy shock kept up the pressure on oil prices, inflation expectations and rate-hike bets. Global equities were volatile against that backdrop as the risk-off turn took some attention away from the AI frenzy, though major indexes ticked up later in the week, led by buoyant chipmakers. Government borrowing costs notched several milestones as bonds came under renewed pressure this week, with 30-year U.S. Treasury yields hitting their highest point since 2007. Japan's long-dated borrowing costs also hit new record highs and Britain's gilt yields hit their highest since the 1990s as investors fretted about a possible change in Prime Minister. The bond selling abated late in the week, with gilts catching a break from below-forecast UK inflation and signals from the main challenger to Keir Starmer's premiership, Manchester mayor Andy Burnham, that he would stick to the government's existing fiscal rules. But the situation in the Gulf remained the major aggravator of bond yields as the energy shock showed no sign of abating. Oil prices were volatile throughout the week, with fresh attacks in the region over the weekend pushing Brent crude back over $110 per barrel on Monday. Prices later dipped as low as $105/bbl on Wednesday after reports that supertankers carrying some 6 million barrels had transited the Strait of Hormuz. Meantime, President Trump continued his hardball strategy: floating fresh military action while urging Tehran to strike a peace deal, all while talking up prospects for a breakthrough. Oil prices spiked once more on Thursday, however, after Tehran appeared to harden its stance on its nuclear programme, underscoring the distance that remains between the two sides’ negotiating positions. The clock is ticking for energy markets. Experts including IEA chief Fatih Birol warned this week of a looming crunch point, as the world’s crude inventories threaten to hit critically low levels in the near future if the Strait of Hormuz stays effectively shut. That could mean the global market is only months away from a breaking point. While any let-up in oil prices could relieve pressure in the bond market, the summer months could be a real crunch in disrupted fuel supplies. Indeed, the past week's ructions could be a foreshadowing of what’s in store for markets now that – under the new leadership of Kevin Warsh – they can no longer assume that the Federal Reserve will always step in to buy bonds in a pinch. Warsh is taking over the helm at a difficult moment. Set to be sworn in at the White House later today, Warsh has been expected to seek rate cuts once in his post, in keeping with the president’s long-stated wishes. But that might not be possible given the inflation backdrop. Curiously enough, though, President Trump seemed to step back this week from his call for immediate rate cuts. In remarks made to the Washington Examiner, he told the paper he would let Warsh “do what he wants to do” on rates. Is that an acknowledgement that rates simply cannot come down as price pressures compound? Perhaps, and Fed policymakers increasingly seem to agree. Minutes from its April policy meeting, released on Wednesday, gave more colour around the hawkish dissents in last month’s statement. Given that accelerating inflation has pushed real interest rates into negative territory both in the U.S. and elsewhere, policymakers may soon be forced to raise rates – whether they want to or not. In company news, this week brought one of the most hotly awaited events of the earnings season as chip giant Nvidia reported first-quarter results. It produced a strong beat, though the share price response was muted. That’s a sign of how much optimism is already in the price and how high the bar is for the world’s most valuable company to continue wowing markets – a bar that threatens to rise further as bond yields soar. Elsewhere in the AI value chain, a planned strike by Samsung workers dragged down the tech giant’s shares on Wednesday, though the South Korean chipmaker surged 8.5% to a record high on Thursday – pulling the broader KOSPI index up with it – after an 11th-hour deal averted the strike. There’s more excitement to come where tech is concerned as Elon Musk’s SpaceX filed on Wednesday for its long-awaited IPO, which could be the largest in history. It could list its shares as early as June 12 on the Nasdaq, according to Reuters sources. There were also reports that OpenAI plans to file for an IPO shortly, with a possible listing date in early September and AI rival Anthropic is also expected to hit the Street. For more data-driven insights on markets and commodities, check out Reuters Open Interest. You can learn: Why might AI push up the neutral interest rate? How could the new status quo in the Gulf threaten the dominance of the U.S. dollar? How can Australia's LNG sector be both uninvestable and the country’s greatest opportunity for growth? What’s up with surprisingly strong zinc? Which nations are most vulnerable to the diesel price squeeze? Why might China bulls need to tread carefully? What are three key reasons why the equity rally keeps going? I’d love to hear from you, so please reach out to me at mike.dolan@thomsonreuters.com. This weekend, we're reading... RON BOUSSO, ROI Energy Columnist: In his Substack Noahpinion, economics columnist Noah Smith argues that militaries without drones are obsolete in modern warfare, warning that drones produced in a single day could destroy a year's worth of tank output from Rheinmetall. Scary stuff. GAVIN MAGUIRE, ROI Global Energy Transition Columnist: A report from the International Renewable Energy Agency on decarbonizing heavy road transport shows that heavy trucks, long seen as permanently reliant on diesel because of the high cost and weight of batteries, are becoming increasingly viable for electrification. Things are changing, and fast. CLYDE RUSSELL, ROI Asia Commodities and Energy Columnist: Former Reuters columnist John Kemp's slide deck offers a comprehensive but clear look at the impact of the effective closure of the Strait of Hormuz on global oil markets, with detailed analysis of both flows and prices. We're listening to... RON BOUSSO, ROI Energy Columnist: This Oxford Institute for Energy Studies podcast analyzes the volatile and often unexpected response of oil prices to the Hormuz crisis. And we're watching... JAMIE MCGEEVER, ROI Markets Columnist: In March, leading oil analysts Amrita Sen of Energy Aspects and Jeff Currie of Carlyle discussed the energy shock from the then-three-week-old Iran war. Two months on, with the Strait of Hormuz still closed, they reconvene — and remain bearish. If markets are in "la la land," as Currie says, why is oil near $100, not $200?