Global Markets Shaken by a 'Rate Shock'... Could It Trigger an AI Bubble Burst?

Fears of a sharp rise in long-term global interest rates are hitting world stock markets, which have been riding the Artificial Intelligence (AI) rally. As government bond yields in the U.S., Japan and Europe surge at the same time, a warning that "the biggest enemy of the AI bubble is high interest rates" is spreading across Wall Street. With oil prices rising on the prolonged Middle East war and inflation concerns returning, tension in global financial markets is also building quickly.
■ Wall Street warns that rates could burst the AI bubble
According to The Wall Street Journal and other outlets on the 17th local time, the yield on the U.S. 10-year Treasury note briefly topped 4.5% on the 16th, while the 30-year yield climbed above the psychological 5% threshold. The 30-year yield in the U.K. hit its highest level in 28 years. Long-term yields in major economies, including Germany, Spain and Australia, also rose together. Recognizing the seriousness of the situation, finance ministers from the Group of Seven (G7) met in Paris, France, on the 18th to discuss the global bond selloff in depth.
Behind the synchronized turmoil in global bond markets lies Middle East risk. As the possibility of a prolonged blockade of the Strait of Hormuz grows, international oil prices are again facing upward pressure, and markets are beginning to price in the risk of renewed inflation. Analysts say the rise in oil prices is stoking inflation and could ultimately delay rate cuts by central banks, which is driving the bond selloff.
Equities are reacting most sharply. In particular, U.S. tech stocks, which had surged on the AI frenzy, are being rattled by upward pressure on long-term rates. On the 16th, the S&P 500 posted its biggest drop since March. The index's 12-month forward price-to-earnings ratio stands at 21.3 times, well above the long-term average of 16 times. When rates rise, the present value of future earnings falls, so richly valued growth stocks take the biggest hit.
On Wall Street, some are even saying that "the biggest enemy of the AI rally is not rival companies, but Treasury yields." For the AI investment boom to continue, massive spending on data centers and semiconductor facilities must keep going, but higher long-term rates directly raise financing costs for these companies.
Kevin Thozet, an investment committee member at the European asset manager Carmignac, described long-term rates as "the point where AI capital expenditure costs and private credit market risks intersect." Alexandre Drabowicz, chief investment officer at IndiaSuez Wealth Management, warned that the U.S. 30-year yield at 5% is "danger territory for equities."
■ "The bond shock is not over yet" as Japan is also shaken
The rate shock is also hitting Japan hard. The yield on Japan's 10-year government bond surged to as high as 2.8% intraday, the highest level in about 29 years and six months since 1996. The 30-year Japanese government bond yield rose above 4% for the first time ever, and the 40-year yield also climbed past 4.2% to a record high.
The shock is even greater because Japan has long been a country of ultra-low interest rates. Japanese government bond yields have served as a benchmark for low rates in global financial markets, and that anchor is now beginning to wobble.
Nihon Keizai Shimbun, or The Nikkei, noted that "concerns over fiscal expansion have also added upward pressure on yields as the Japanese government considers an extra budget to respond to the Middle East." That came on top of rising U.S. long-term yields, which further accelerated selling in Japanese government bonds.
The weaker yen is another source of concern. The USD/JPY exchange rate rose to the upper 158 yen range on the day, moving close again to the 160 level. Market participants are also discussing the possibility that the Bank of Japan (BOJ) may face greater pressure to tighten further.
Expectations for rate cuts by the Federal Reserve System (Fed) are also fading quickly on Wall Street. Jeffrey Gundlach, chief executive officer of DoubleLine Capital and known as the "bond king," said in a Fox News interview that "a Fed rate cut is virtually impossible under the current circumstances." He added, "With the 2-year Treasury yield nearly 0.5 percentage point above the policy rate, the Fed cannot cut rates," and said that "inflationary pressure is likely to strengthen again because of the war with Iran and rising oil prices."
[email protected] Kim Kyung-min Reporter