Bond Yields Pressure Markets as AI Stocks Rally and Fed Rate Hike Bets Fade | Ukraine news

A fragile calm is returning to markets, but bond yields, energy prices and political pressure could quickly revive investor anxiety.

Global markets entered the traditionally quieter summer period in mid-August, but this week investors were once again concerned about developments in the U.S. government bond market. Rising Treasury yields threatened to spoil the positive mood in equity markets, where stocks were supported by strong quarterly reports from companies linked to the development of artificial intelligence.

Tensions eased somewhat following the July U.S. inflation data. Consumer and producer price figures proved less alarming than market participants had feared. Annual inflation slowed slightly under both indicators, giving the Federal Reserve more reason not to rush into raising interest rates as early as September.

Futures markets lowered their estimate of the likelihood of a September Fed rate hike to roughly one-third. Before the release of the inflation data, the odds of such a decision had been viewed as nearly even. The market was also supported by steady demand at U.S. government debt auctions totaling around $125 billion. The yield on two-year U.S. bonds fell to its lowest level in about a month.

Costly Borrowing and Inflation Risks

Despite the short-term relief, problems in the debt market have not disappeared. This week, the U.S. Treasury sold 10-year bonds at the highest auction yield in 19 years. The yield on 30-year securities at Thursday’s auction was the highest in 25 years.

American households are already feeling the impact of high rates: the average rate on a 30-year fixed-rate mortgage rose to 6.7%.

Energy prices are also weighing on inflation expectations. Hopes for a rapid drop in oil prices due to a possible end to the war with Iran have not yet materialized. Brent crude approached $90 per barrel this week, while the average U.S. retail gasoline price remained above $4 per gallon.

Iran claims control over the Strait of Hormuz, while sporadic attacks continue in the Persian Gulf and the Red Sea. On August 13, the United States raised the possibility of an indefinite blockade of Iranian ports. Vessel traffic through the Strait of Hormuz declined this week, and actual oil exports from the region may be lower than the U.S. side expects.

If the energy factor were the only source of inflationary pressure, the Fed could view it as temporary. At the same time, the regulator focuses primarily on the Personal Consumption Expenditures Price Index, or PCE. The Cleveland Federal Reserve Bank’s estimate projects PCE inflation at 3.7% in July and August, with core PCE inflation at 3.3%.

Both indicators have remained above the Fed’s 2% target for nearly six years. Since the start of 2026, they have not fallen below 3%.

Dispute Within the Fed

Supporters of a more accommodative policy expect that higher prices for goods caused by tariffs will soon stop affecting inflation indexes. They also anticipate downward revisions to PCE data, a gradual cooling of the labor market, and productivity growth driven by artificial intelligence.

Advocates of a tighter stance point to overly loose financial conditions, rising corporate debt, limited supply of technology products, and a declining unemployment rate. They are also concerned about the risk of weakening confidence in the Fed’s commitment to returning inflation to its target level.

Cleveland Federal Reserve Bank President Beth Hammack, who voted for a rate hike at the previous meeting, believes the Fed must act without delay.

If it takes us another three or four years to achieve this, would that be acceptable?

– Beth Hammack

Boston Federal Reserve Bank President Susan Collins, who does not have voting rights on the Federal Open Market Committee this year, said she is prepared to support a rate change as early as this month.

Political Pressure and the Japanese Factor

Political pressure on the central bank is also causing additional concern. At the end of last week, President Donald Trump sent Federal Reserve Board Governor Lisa Cook a letter demanding an explanation regarding disputed allegations of mortgage fraud, warning that she could otherwise face dismissal.

In June, the U.S. Supreme Court ruled that the president cannot dismiss a Federal Reserve Board governor without evidence of wrongdoing. The new deadline for Lisa Cook has again intensified debate over the independence of the U.S. central bank from politics.

The Treasury market is also watching Japan’s actions. Prolonged intervention to support the weakening yen could force Tokyo to sell U.S. bonds to finance currency operations. Following recent joint steps by Washington and Tokyo, pressure on the yen has temporarily eased, but expectations are growing that the Bank of Japan will support the currency by raising rates.

On August 14, reports emerged that the Bank of Japan could raise rates in September and subsequently accelerate monetary tightening.

Stocks Rise on Artificial Intelligence

Unlike the debt segment, equity markets ended the week on a positive note. Wall Street indexes returned to record levels, while year-on-year earnings growth for S&P 500 companies exceeded 50% in the second quarter. In Europe, corporate earnings growth reached 23%.

Companies operating in artificial intelligence once again attracted the most investor attention. Shares of CoreWeave and Super Micro Computer rose by around 20% on Wednesday after strong financial results confirmed the scale of investment in AI infrastructure.

Against the backdrop of recovering stock indexes and low volatility, speculation about potential major artificial intelligence IPOs has intensified. Anthropic investors expect a share offering in October that could value the company at up to $2 trillion. If it happens, the deal could become the largest initial public offering in history.

The impact of the artificial intelligence boom and large-scale capital investment is visible not only in the United States. The British economy unexpectedly posted strong growth in June, and in terms of GDP growth in the second quarter, the United Kingdom became the fastest-growing G7 economy for the second consecutive quarter.

In the first half of the year, the annual growth rate of the British economy stood at 2%. The information and communications sector accounted for nearly half of the 0.4% quarterly increase in GDP.

If there is no new escalation in the Persian Gulf, the summer lull in markets may deepen next week. Traders will analyze the minutes of last month’s divided Fed meeting, U.S. data on industry, business activity, and the housing market, as well as China’s macroeconomic statistics and inflation reports from European countries. Attention to the Fed’s Jackson Hole symposium and Nvidia’s financial results, expected a week later, will only increase.