Global bond markets are experiencing significant stress as US 10-year bond yields have surged to 4.66 per cent, while the 30-year yield has jumped to 5.19 per cent, marking a 22-year high. According to reports from Business Standard, this dramatic rise in yields reflects growing market concerns about central banks' ability to contain inflation, with investors expecting interest rate increases. The bond market sell-off is being driven by rising inflation globally, creating a challenging environment for fixed-income investors worldwide. However, recent analysis suggests that rising Treasury yields are not the primary driver of Asian equity outflows - oil supply disruptions are the actual thesis. The Strait of Hormuz closure has sent Brent crude above $120 per barrel, with Asia - which takes 85% of Gulf crude - paying the highest costs. Just 4% of global asset managers polled by Bank of America this month see a "hard landing" on the horizon, while more than 60% expect the 30-year U.S. Treasury yield to top 6% over the next 12 months, suggesting investors are betting the AI boom has further to run.
India's bond market is facing significant pressure as the 10-year yield has risen to 7.15 per cent, as reported by Business Standard. This increase in yields will significantly raise borrowing costs for both the government and private sector, creating additional fiscal and economic challenges. The elevated bond yields reflect broader concerns about India's fiscal position and inflation trajectory amid the current macroeconomic environment. Foreign portfolio investors have withdrawn more than $26 billion from Indian equities in the first four months of 2026, with selling accelerating to roughly ₹60,847 crore in April alone and continuing through May with another ₹27,000 crore pulled out. The Sensex is down 9.8% year-to-date, while the Nifty 50 has declined 8.2%, reflecting the impact of geopolitical supply disruptions.
The AI investment surge is emerging as a major driver of bond market volatility, with Goldman Sachs estimating $7.6 trillion in AI capital expenditure over the next five years. According to Reuters, this massive investment boom is forcing investment firms to reassess long-term macroeconomic impacts of AI more broadly. The Institute of International Finance notes that a successful AI cycle should raise R-star - the theoretical neutral real interest rate - because higher expected returns and stronger capital formation will lift desired investment relative to savings. Barclays' annual Equity-Gilt Study reached a similar conclusion, stating that "rising productivity, combined with large capital expenditure needs, points to a higher neutral real interest rate." The sheer scale of AI capex is perhaps a bigger driver of bonds and stocks alike, with markets pricing in the long-term productivity surge from AI productivity gains.
The Strait of Hormuz closure has created an actual supply shortage rather than just higher energy prices, with oil imports to Asia plunging 30% year-over-year in April to the lowest levels since October 2015. India faces unique vulnerability as it imports roughly 60% of its liquefied petroleum gas, with about 90% of those shipments coming from the Gulf. As reported by Business Standard, this geography problem creates a structural risk that rising Treasury yields merely amplify. India's energy import dependency makes it particularly susceptible to supply disruptions, with the country having no alternative sourcing options when the Hormuz corridor is disrupted. The analysis suggests that rupee depreciation serves a dual purpose - curtailing expenditure on imported goods and services while providing an effective mechanism for adjustment.
Despite the challenging macroeconomic environment, the stock market has remained reasonably stable, supported mainly by domestic investment, according to Business Standard. The analysis indicates that market valuations are currently fair, suggesting a sharp correction appears unlikely. However, the situation could change if the West Asia crisis aggravates and crude oil prices spike above $140 per barrel. In the worst-case scenario, FY27 GDP growth may decline to 6 per cent and CPI inflation may rise to 5.5 per cent, requiring coordinated debt management from both the RBI and the government. The current market dislocation presents opportunities for investors who can tolerate short-term volatility, with the dislocation in severely beaten-down energy-importing markets - India most of all - may eventually create entry points once the oil supply chain stabilizes. However, the AI boom's impact on labor markets remains uncertain, with TS Lombard economist Dario Perkins noting that "Either the wage share must recover, or all this talk about a new regime of structurally higher bond yields is probably wrong."
