Tech powers higher while bond markets flash warning signals
Markets moved toward the end of the week with a slightly calmer tone as tentative optimism surrounding ongoing US-Iran talks helped stabilize risk sentiment. Negotiations remain centred around two key sticking points: Iran’s insistence on retaining its uranium stockpile domestically and its proposal for a transit toll system through the Strait of Hormuz. While there is still little clarity on whether a genuine breakthrough is close, the market has treated the continuation of dialogue itself as modestly constructive. Brent crude continues to trade with a softer offered bias, while the S&P 500 edged slightly higher during Asia trade as investors leaned back into risk on the view that lower oil prices help ease pressure on inflation and broader market sentiment.
Still, underneath the surface, the bigger macro story remains the steady rise in US yields. The 2-year Treasury continues holding above 4%, while the 10-year has climbed nearly 20 basis points month-to-date toward 4.57%. Markets are increasingly repricing the possibility that the Fed may need to stay tighter for longer or even hike as growth and inflation remain sticky. That yield backdrop continues supporting the dollar, with DXY firming back above the 99 level as carry demand re-emerges.
Recent US data continues to reinforce that dynamic. Initial jobless claims remain historically low, while the S&P Global composite PMI held at 51.7 in May, keeping the economy in expansion territory. In other words, the US economy still looks resilient enough to keep expectations for Fed easing restrained for now.
Across Asia, the combination of higher US yields and elevated oil prices continues to pressure regional FX. Even though Brent eased modestly, crude prices remain above $100 per barrel, keeping inflation concerns and import pressures elevated across much of the region. Policy support may slow the adjustment, but as long as US yields continue rising, regional currencies are likely to remain defensive.
The bigger issue for global markets, however, is the growing disconnect between equities and bonds. The S&P 500 continues trading as if the recent surge in bond volatility simply does not matter. Rate volatility has moved sharply higher, yet equities continue to price a near-perfect AI-driven growth environment. That gap between bond market stress and equity market complacency is becoming increasingly difficult to ignore.
Part of the reason is that AI enthusiasm continues to overpower almost every other macro concern. Investors remain heavily focused on AI capex, semiconductor momentum, and the next wave of mega IPOs. OpenAI and Anthropic are reportedly targeting $60 billion funding rounds each, potentially creating some of the largest capital raises ever seen in tech markets. Those deals alone could become major liquidity events by year-end.
At the same time, there are growing signs that the AI boom may be contributing to inflation pressures rather than easing them. Software CPI remains extremely elevated, capital goods inflation is running at multi-decade highs, and AI-related export demand across North Asia continues accelerating. Semiconductor companies are also aggressively competing for labour and capacity, reinforcing the sense that this is becoming a full-scale capex cycle rather than a clean productivity story.
That matters because valuations will eventually become increasingly sensitive to higher rates. The S&P 500 Equity Risk Premium has now fallen to levels below the 2007 lows, meaning equities are offering less compensation for rising bond yields than they historically have. If yields continue to move higher alongside a hawkish Fed repricing, the market may eventually be forced to reassess how sustainable the AI melt-up really is.
For now, though, momentum remains firmly in control. Positioning data continues to show strong flows into semiconductors and AI hardware, while software exposure outside the mega-cap names remains relatively light. In Asia, names like SK Hynix continue to see aggressive upside chasing, while China AI hardware exposure still carries one of the richest upside call skews globally, as investors continue to pay heavily for upside participation.
The market still wants exposure to the AI trade. The question now is whether higher yields will eventually trigger equities to pay attention to the bond market again.
