The AI-driven rally pushing Wall Street to record highs is increasingly facing pressure from a surging bond market, as rising Treasury yields begin to challenge the stretched valuations supporting Nvidia and the broader tech sector.
If 10-year Treasury yields continue climbing toward 5%, investors will stop paying 30, 40, or even 50 times earnings for growth stocks.
This is where the strain on AI valuations starts to look significantly more serious.
Since the temporary ceasefire in the Middle East in April restored risk appetite, the S&P 500 has climbed about 12%, with gains heavily concentrated in Nvidia and a small group of AI-focused megacap stocks that have driven most of the index’s performance.
Treasury yields challenge AI-driven valuations
At the same time, the US 10-year Treasury yield has risen to its highest level in over a year as investors quickly reprice inflation risks linked to oil prices above $100 a barrel, along with expectations that interest rates could remain elevated for a longer period.
Wall Street has largely priced in the belief that AI-driven growth can outpace the impact of higher interest rates.
However, bond markets are now firmly pushing back against that assumption in a much more meaningful way, as I was quoted by CNN, CNBC, Wall Street Journal, Daily Mail, Daily Mirror, The Guardian, GB News, Asia Times, Investing.com, Investor Ideas, London Loves Business, Pound Sterling Live, Business Money, IFA Magazine, The Daily Brit, African Eye Report, Money Marketing, Financial Investigator, and Share Café, amongst other media.
A closely watched gauge of inflation expectations, the one-year, one-year inflation swap, has climbed above 4% for the first time since early 2025, deepening concerns in bond markets that central banks could struggle to fully contain inflation.
Markets that only a few months ago were aggressively anticipating Federal Reserve rate cuts are now rapidly shifting toward the opposite view.
The AI-driven market rally performs strongest when interest rates are declining.
But bond markets are now signalling a sharp move in the opposite direction.
Markets that had spent months anticipating aggressive Federal Reserve rate cuts are now quickly reversing those expectations.
Bond markets begin to dominate the narrative
I believe, for US President Donald Trump, the real problem is fast becoming the bond market, as investors sell off government debt, oil prices continue to climb, and Treasury yields rise to levels that are starting to put pressure on the stock market rally that he has promoted throughout both of his presidencies.
Markets are increasingly linking geopolitics, inflation dynamics, and bond yields directly to equity risk.
Trump has long recognised the political importance of rising stock markets, with strong equities projecting confidence, momentum, and economic strength.
However, bond markets are increasingly dominant and challenging the prevailing equity-driven narrative.
At this stage, that shift is emerging as the key risk for investors.
Indeed, investors had largely spent the past year betting that inflation was easing, interest rate cuts were on the horizon, and that AI-led growth would continue to propel equities higher regardless of broader macroeconomic conditions.
That conviction is now starting to unravel as oil prices surge again and inflation expectations rise.
At the same time, bond investors are increasingly demanding higher yields to hold long-term government debt, reflecting growing concerns over inflation, fiscal stability, and political uncertainty across major economies.
In the UK, those concerns are being amplified by domestic politics, with gilt markets likely to view Andy Burnham’s return to Westminster as a major escalation of political and fiscal risk.
Burnham is seen as the most significant risk to the gilt market among leading Labour figures, as investors may link his leadership ambitions with higher public spending, weaker fiscal discipline, and a greater readiness to challenge market limits on government borrowing.
The bond market continues to be influenced by the shock of the Liz Truss mini-budget crisis.
Fixed-income markets often signal trouble first
Investors still recall how rapidly the UK’s credibility deteriorated once markets concluded that fiscal discipline had been undermined.
The political fallout from Burnham’s announcement added further pressure to an already strained market environment. UK 10-year gilt yields climbed to 5.13% last week, reaching their highest level since 2008, as investors weighed the risk of a destabilising Labour leadership contest alongside renewed inflation concerns and rising oil prices.
Markets are increasingly reacting before full policy details emerge, pricing in expectations and probabilities instead of waiting for clarity.
Burnham’s return to Westminster has therefore been enough on its own to heighten bond market concerns about the potential future direction of Labour’s economic policy.
Moreover, globally, government borrowing costs have increased sharply across developed economies as investors reassess inflation expectations, central bank policy, and fiscal expansion. After months of pricing in rapid rate cuts, markets are now adjusting to the likelihood that interest rates could remain elevated for a prolonged period.
Historical patterns suggest that significant market downturns are often signalled first in fixed income markets, rather than equities, as stress builds in government debt pricing before spreading to risk assets.
Bond investors typically respond first to emerging inflation risks, shifting liquidity conditions, and worsening fiscal trends. Equity markets, by contrast, often adjust with a delay, but when they do, the reaction is frequently sharper and more abrupt.
Ultimately, the biggest danger for markets may not be whether AI changes the global economy, but whether investors have underestimated the bond market’s power to reshape valuations, liquidity, and risk appetite far more quickly than expected.
Equity markets have remained heavily concentrated in a narrow group of technology giants, but history shows that when borrowing costs rise sharply and inflation expectations become unstable, even the strongest market narratives can come under pressure.
What now matters most is not simply earnings growth or AI optimism, but whether central banks, governments and bond markets can regain control of inflation expectations before rising yields begin to trigger a broader and far more disruptive repricing across global financial markets.
To read my previous blog post, click here.