Morning Bid: Bonds spoil the AI party

By Mike Dolan

May 18 (Reuters) -

What matters in U.S. and global markets today

By Mike Dolan, Editor-at-Large, Finance and Markets

A bond market crunch meets the AI boom. Aggravated by still-rising oil prices, accelerating inflation, and the threat of higher interest rates and rising government debt ‌estimates, the bond market has been spooked again, casting a pall over AI-obsessed stock markets.

The U.S. Treasury long bond yield has hit ‌its highest level since before the Great Financial Crisis in 2007, with 30-year yields topping 5.159%, while 10-year yields have jumped to their highest in more than a year.

I'll get into that ​and more below.

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BONDS SPOIL THE AI PARTY

As G7 finance chiefs meet in Paris on Monday, bond stress is spreading around the world.

Japan’s long-dated government yields spiralled to record highs on Monday. European yields are at their highest levels, variously, in 15 to 20 years, while Britain, facing a fresh political psychodrama amid brewing ‌challenges to Prime Minister Keir Starmer’s leadership, is seeing ⁠its highest long-term borrowing costs since the 1990s.

Interest rate rises are expected in Europe and Japan next month, with a more than 50% chance the Fed will follow by year-end.

The oil shock in the Gulf is at the heart of ⁠the latest inflation and rate-hike angst. Tensions are rising there once again amid fresh drone strikes, including on a nuclear power plant in the UAE, while the Strait of Hormuz remains effectively closed to all but a trickle of tankers.

World crude prices pushed above $110 per barrel on Monday as U.S. President Donald Trump warned Tehran that ​the “clock ​is ticking” and prepared to discuss military options on Iran, according to Axios reports. Perhaps ​most worryingly, year-end oil futures have risen to over $92/bbl - their ‌highest level of the war so far.

Stock indexes had mostly been ignoring the oil shock, buoyed by the blistering AI investment boom, but they have been dragged back from record highs by the bond jolt. Major U.S. indexes closed down sharply on Friday, while Asian shares slipped on Monday and Wall Street futures edged down before the bell.

Stateside, Nvidia’s results on Wednesday are set to dominate the slate this week as a key test of the AI trade. Meantime, retailers led by Walmart will shed light on the state of the U.S. consumer amid the energy shock. And Monday will see the release of ‌the NAHB housing market index for May, with investors and policymakers keen to monitor ​the impact of elevated mortgage rates.