Investors entered 2026 with the assumption that the Fed would continue to cut rates.

But the fighting in the Middle East and subsequent closure of the Strait of Hormuz shattered those expectations.

The strait is a vital maritime transport corridor, as it’s where 20% of global oil supplies and a significant volume of liquefied natural gas (“LNG”) pass through.

With it choked off, crude oil, LNG, and diesel supplies have fallen below pre-conflict levels, putting a heavy burden on the global economy and reigniting inflation worldwide.

In the U.S., the producer price index for April rose 6% year-over-year, the biggest jump since 2022. Meanwhile, inflation surged to 3.8% in April, well above the Fed’s stated target rate of 2%.

With inflation running hot, the Fed can’t cut rates. In fact, the futures market is pricing in a rate hike by the end of this year. The fear of higher interest rates for longer has recently driven government bond selloffs and have propelled the yield for various Treasurys higher.

The yield for the 10-year U.S. Treasury note—the benchmark for mortgage rate and borrowing costs—rose to 4.6% earlier this week, the highest level since January 2025. Meanwhile, the yield for the 30-year Treasury climbed to 5.1%.

According to Bank of America’s Global Fund Manager Survey, 62% of fund managers expect the 30-year Treasury yield to rise above 6%, should a sizable move in yields play out in the next 12 months.

And it’s not just the U.S. seeing rising yields. Japan’s 30-year government bond has surged to 4.1% while the U.K.’s 30-year gilt has risen to 5.7%.

With global inflation rising, bond investors are demanding higher yields to compensate for this uptick.

And while movements in the bond market may seem like an afterthought for equity investors, these can impact equities.

The 10-year Treasury yield acts as the benchmark discount rate for all future corporate earnings.

When the discount rate jumps from 3.5% to 4.6%, future earnings become less valuable in the present. This dynamic negatively impacts long-duration assets such as high-growth tech stocks, real estate investment trusts (“REITs”), and heavily indebted utilities.

If yields continue to climb then it could eventually impact the AI-driven bull run. The current bull market has ushered in a staggering demand for physical infrastructure.

This includes data centers, advanced cooling systems, advanced chips (in the form of CPUs and GPUs), power management systems, and even dedicated grids.

These undertakings require hundreds of billions of dollars in funding (AI hyperscalers are expected to spend upwards of $700 billion on data centers in 2026 alone), some of which is financed through debt.

When bond debt yields rise, the cost of corporate borrowing rises along with it. Meaning, if financing a data center suddenly costs between 7% to 8% in interest instead of 3% or 4%, tech firms and infrastructure companies may be forced to delay, scale back, or even cancel buildouts outright.

And when that happens, infrastructure spending decelerates, slowing the AI boom along with it.

In all, with the fighting in the Middle East reaching its third month with no end in sight, and the market is starting to feel its ramifications aside from rising oil prices.

Yields pulled back on Wednesday following Tuesday’s quick rise. That said, even if you are solely an equity investor, it is important to continue monitoring movements in the bond market in order to gauge the health of the wider economy and today’s stock market.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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