Rising Yields, Rising Risks: Global Bond Yields Surge Again Following the Trump-Xi Meeting

💡The recent surge in global bond yields was primarily driven by two major developments: the lack of meaningful progress during the Trump-Xi meeting, which reignited concerns over energy supply risk, and stronger-than-expected US inflation data, particularly from energy-related categories. These events intensified fears that elevated oil prices could fuel persistent inflationary pressure, strengthening expectations for prolonged high interest rates and pushing bond yields higher. The US 30-year Treasury yield reached 5.13%, while UK and Japanese yields of the same maturity peaked at 5.85% and 4.09%, respectively, reflecting these heightened market concerns.

💡US inflation data, including CPI and PPI reports, indicated that price increases were primarily localized to energy-related categories and statistical distortions, rather than representing broad-based price increases. Energy prices rose significantly in both CPI (3.8% month-over-month) and PPI (7.8%), contributing over 40% to total CPI inflation. While core services inflation in CPI accelerated to 0.5% and PPI services inflation rose to 1.2%, a deeper analysis revealed that these increases were heavily concentrated in energy-linked sectors such as fuel retailing and transportation, or due to one-off statistical adjustments in rent data from a past government shutdown. Core goods inflation remained subdued at 0.03%, suggesting a contained inflation dynamic driven by energy.

💡The primary driver of rising service-related Producer Price Index (PPI) inflation is its heavy concentration in energy-linked categories and sectors highly sensitive to energy costs. Specifically, fuel and lubricant retailing surged by 26.6% month-over-month, while frontline transportation and logistics services such as truck freight transportation (+8.1%) and air freight transportation (+3.6%) were also significant contributors. In contrast, other service categories excluding trade, transportation, and warehousing rose only 0.1% month-over-month, indicating that the increase in service PPI is largely a transmission of higher oil prices into energy-dependent sectors rather than a broad-based inflationary spread.

💡MacroMicro believes US Treasury yields influence Trump's policy on Iran because managing debt is a core priority for the US, currently at the peak of its global hegemony. According to Ray Dalio's "The Big Cycle" concept, debt accumulation is a critical risk for a peak hegemonic nation, as its stability underpins the credibility of the US dollar and the US Treasury market. If debt issues, reflected in surging Treasury yields, spiral out of control, it could destabilize the foundation of US hegemony more profoundly than a single geopolitical conflict. Therefore, when the 10-year Treasury yield breaches a critical warning zone, such as 4.4% to 4.6%, it historically prompts a softening of Trump's stance to address economic pressures.

💡Markets will scrutinize service inflation, particularly non-housing components, more intensely going forward due to persistently high oil prices. First, next month's rent month-over-month growth rate will be closely watched to confirm if the recent jump was merely a temporary statistical distortion from past missing data during a government shutdown, rather than a true resurgence in rental trends. Second, while markets previously tolerated delayed downward movement in non-housing services inflation (services excluding rent) under expectations of cooling goods prices, the current high-oil-price environment demands that non-housing services inflation at least stop accelerating in the near term. Failure to do so, combined with elevated oil prices, will maintain pressure on bond markets from inflation and interest rate expectations.

💡The long-term solution for the US to address its increasing debt pressures is to boost productivity growth. Higher economic growth, driven by improved productivity, will dilute the debt-to-GDP ratio and provide more runway for the sustainability of interest rates. The Trump administration recognizes that domestic debt burdens constrain US global policymaking, making productivity gains crucial. This approach allows for greater tolerance of higher interest rates as GDP growth expands, supporting the sustainability of national finances. AI development is currently the most significant factor expected to contribute to this productivity growth, potentially adding 0.5 to 3.5 percentage points annually.

💡AI development could significantly impact US productivity growth and interest rate tolerance by boosting economic output. Major institutions expect AI to contribute between 0.5 to 3.5 percentage points annually to US productivity growth, substantially higher than the 1.5% annualized growth rate observed from 2012 to 2019. If AI successfully drives such an increase, it will lead to higher nominal GDP growth. This higher growth would dilute the debt-to-GDP ratio and provide more fiscal space, naturally increasing markets' tolerance for higher interest rates. The current 10-year Treasury yield warning zone of 4.4% to 4.6% already corresponds roughly to the US nominal GDP growth rate (5% for 2025), and sustained AI-driven productivity gains could further raise this tolerance.

💡MacroMicro predicts Trump's stance on the Iran issue will likely soften due to the surge in US Treasury yields, which reflects increasing debt pressures on the foundations of US global dominance. Given that managing debt is the core priority for a hegemonic nation, and Treasury yields breaching critical warning levels (like 4.6%) indicate significant economic stress, it becomes highly probable that Trump will prioritize a swift resolution to crude oil supply bottlenecks. This shift is motivated by the need to stabilize financial markets and maintain the credibility of the US dollar and Treasury market, which are fundamental to US hegemony, rather than risking a direct conflict that exacerbates debt concerns.

💡MacroMicro maintains a constructive outlook on global equities, expecting them to outperform bonds, especially if the Strait of Hormuz resumes normal operations. Pullbacks for valuation correction after a strong rebound are considered normal. If oil supply bottlenecks are resolved, market focus will return to fundamentals. Based on Q1 earnings season results, corporate earnings momentum remains strong, which is the primary reason for this positive outlook. This suggests that with reduced geopolitical and inflation risks, equity markets are poised to benefit from robust underlying corporate performance.

💡Higher term premiums affect long-dated US Treasuries by increasing their volatility and limiting the potential for their yields to decline materially. Term premiums are the additional compensation investors demand for holding longer-term bonds compared to rolling over shorter-term bonds. When debt pressures rise, as seen in the current US context, investors demand higher term premiums on long-dated Treasuries, reflecting increased risk. This higher premium makes these bonds more sensitive to market shifts and dampens any potential for their yields to fall significantly, thereby reducing their attractiveness and increasing their price fluctuations.