Bond Selloff and AI Enthusiasm Collide in a Quarter-Opening Tug-of-War
TREE NEWS reports: Global markets opened the new quarter with starkly divergent forces at work. Asian equities rallied hard on the back of Micron’s blowout earnings, with Japan’s Nikkei 225 surging 3.30% to 68,956.72 and South Korea’s KOSPI climbing 1.95% to 6,971.36. But the mood shifted violently during European hours as a deepening government bond rout sent yields to multi-decade highs, dragging European stocks lower and briefly gutting US equity futures gains.
The 10-year Treasury yield touched 5.33%, its highest since 2002, before easing to around 5.29%. The 30-year yield also set a fresh 2002 peak. The UK’s 30-year gilt briefly breached 6% for the first time since 1998. The French-German 10-year spread widened 4 basis points to 131 basis points as France’s budget woes kept it at the epicenter of the turbulence. Germany’s 10-year yield, by contrast, fell 4 basis points to 3.55%.
Yet by late European trading, AI-linked optimism had reasserted itself. Nasdaq 100 futures rose nearly 0.8%, S&P 500 futures added 0.4%, and Dow futures gained 0.3%. Alphabet climbed more than 2% premarket as it began rolling out its flagship Gemini 4 Argon model.
Why the Bond Market Is the Story
The fixed-income stress is not a single-country event but a synchronized repricing of global sovereign risk. Strategists point to a “triple hit”: heavy government spending, resilient growth, and geopolitical supply shocks. As one senior portfolio manager put it, markets have entered a reflationary regime and are still pricing it too slowly.
- US macro data has been strong: core PCE rose just 0.2%, below expectations, while consumer spending grew at its fastest pace in over a year and Q2 growth beat forecasts.
- Money markets now price less than a 40% chance of an October Fed hike, though a fourth-quarter move remains live.
- Australia’s 10-year yield rose 4bp to 5.39%; Japan’s 10-year added 5bp to 3.10%.
AI Earnings Offset Rate Pressure
Micron reported fiscal fourth-quarter revenue of $54.229 billion, up 379% year over year and above the $51.49 billion consensus. It guided first-quarter revenue to a $61.5 billion midpoint versus $57.02 billion expected, though it warned rising compensation costs would compress margins. Investors chose to focus on the demand outlook rather than the margin caveat, with the CEO saying supply-demand conditions should tighten markedly in 2027 and 2028.
That optimism rippled through Asian semiconductor names: Kioxia and Tokyo Electron each rose about 6%, while SoftBank Group gained nearly 4%.
Commodities and Currencies
Oil re-emerged as a key risk variable. WTI rose 1% to $91.30 a barrel, while Brent traded near $100. The dollar index broke above its July high to 101.66, a fresh late-June peak and a fourth straight daily gain. The euro fell 0.3% to 1.1296, sterling slipped 0.3% to 1.3222, and the yen weakened 0.4% to 158.10. Offshore yuan was roughly flat at 6.7155. Gold recovered 0.6% to around $4,183 an ounce, with silver also rebounding.
Key Takeaways for Investors
- Duration risk is back. With 30-year yields at 2002 highs, long-dated bonds offer little shelter and remain vulnerable to further fiscal and inflation surprises.
- AI remains the equity market’s shock absorber. Semis and megacap tech are cushioning the blow from higher rates, but momentum outside tech is fading.
- Watch the bond-oil loop. Higher yields may themselves be pushing crude higher, risking a negative feedback cycle.
- France is the pressure point. Thursday’s budget disclosure could worsen the European bond selloff.
- Dollar strength is a headwind for emerging markets and commodities priced in USD.
For now, the AI trade is winning the tug-of-war. But with sovereign yields at generational highs and reflation risks building, the margin for error is thin.
