The bond reckoning is about to meet the AI mirage

To start with bonds, last week fixed income markets seemed to collectively decide that the inflation unleashed by the Iran War and energy crunch deserves to be taken seriously.

Yields surged everywhere (bond prices move inversely to yields). The long end of the curve was particularly brutal; 30-year yields ended the week above 4% in Japan (where equivalent rates have spent the better part of the last decade around zero), approached 6% in the UK (for the first time since 1998), and above 5% in the US.

These are not small moves. Even at the short end things are looking scary; the US two-year yield has risen 20bps in the past 10 days. Futures markets are now pricing in more than a 50% chance of at least one rate hike in the US by year end. One week ago, that probability was barely 15%.

South Africa has not been immune. Over the past month the benchmark SA 10-year government bond has risen by more than 60bps, a reminder that SA – despite its own unique domestic political and economic challenges – remains tethered to global capital flows. When the world’s investors grow fearful of inflation and need additional compensation to hold sovereign debt, history shows that SA bonds feel the pain. This time is unlikely to be different.

The trigger

The trigger seems to have been the US wholesale inflation data released last week that confirmed what markets have been dreading; the inflation unleashed by this war is obstinate, and filtering through rapidly to the broader economy. Energy prices remain at least double what they were before the end of February. Oil markets remain volatile, with inventories being drawn down at a pace that cannot continue indefinitely.

Should supply constraints tighten further – a plausible scenario should the conflict in the Middle East escalate once again – a non-linear surge in oil prices is possible. This would mean benchmark crude prices moving substantively higher, to $150 or even $200 a barrel. For SA, which obviously imports most of its crude, an oil shock of that nature would be acute.

There are additional structural dimensions to this bond market sell-off beyond the energy-driven inflation. Central banks are no longer absorbing government debt the way they did in the decade following the 2008 crisis and pandemic, when quantitative easing was the dominant force in global bond markets.

The Bank of England is actively selling its bond holdings. The incoming chairperson of the Federal Reserve, Kevin Warsh, is known to favour further reductions of the bank’s balance sheet. Gulf sovereign wealth funds and Chinese institutions – historically important buyers of US treasuries – may prove less dependable in the months ahead, given the geopolitical ructions. Governments everywhere continue to borrow heavily, driven by defence spending, energy subsidies and political aversion to higher taxes. More supply paired with lower demand is a recipe for higher borrowing costs.

Narrow equity markets spell trouble ahead

Turning to equities, a different – if related – anxiety is building. US stock performance, which has been the overwhelming bright spot in global equity markets year to date in 2026, has grown startlingly narrow. For much of the past decade, bull markets have been relatively broad-based trades, with large proportions of listed companies participating in the gains.

That is no longer the case. Since late April the rally has been the exclusive preserve of megacap technology companies, specifically those with exposure to artificial intelligence. In the past two weeks, the rally has narrowed further; semiconductor companies have surged while the rest of the market has stagnated.

The pattern is worryingly reminiscent of 2021. Then, markets climbed on a narrow tech-based foundation before collapsing when the Federal Reserve declared it needed to start hiking rates in late 2021. Now, AI is simply the only trade in town.

The froth in AI-related assets has become difficult to ignore. AI chipmaker Cerebras closed 68% above its IPO price on its first day of trading, at one point trading more than 100% higher. Ford, a carmaker founded in 1903, saw its shares jump 20% in two days after announcing plans to make batteries for AI data centres. Anthropic, the maker of the Claude chatbot, saw its valuation rise from $350-billion to $900-billion in the space of three months.

This intense reliance on chips and AI as a source of high returns, not just in the US, is alarming even those who believe the transformative potential of the technology itself is real. It is all starting to feel worryingly reminiscent of the spring of 2000.

What could trigger a market correction?

There are two known unknowns. First is the planned stock market listings for SpaceX and OpenAI, both of which are likely to be more than $1-trillion. That could be a peak indicator. In a market already constrained by liquidity, such gargantuan capital raises will suck money from the rest of the market.

But the most likely possible source of stress is the global energy crisis, which has not gone away, and could very easily get much worse very quickly. Right now, the world is somewhat insulated from the worst effects of constrained energy supplies around Iran because it is running down reserves of oil and gas. That is to be expected. But this cannot continue for ever. Some form of energy rationing, even in developed economies, is not beyond the realms of possibility in the coming months.

If that happened there would be a rapid surge in energy prices. Weaker government bond markets all over the world are already a sign that this threat is real, that inflation could accelerate and that governments might need to borrow their way out of trouble – a tough ask given already elevated levels of debt. It is not at all difficult to imagine this leading to some kind of financial market reset.

Until recently the great puzzle of this cycle was the resilience of financial markets in the face of real macroeconomic stress. That puzzle is resolving itself. Outside a narrow cohort of AI-exposed names, equities have been going nowhere for a month. Bond markets are sending a warning that has gone unheeded for too long.

The question is no longer whether something gives, but what, and when. DM