Bond rates rose, AI values dropped, and trade tariffs paused
How high are long-term bond yields?
The 30-year Treasury bond yield topped 5.33% Tuesday, its highest since June 2007, and the 10-year yield reached 4.75%. Short-term bonds barely moved. The long-term bonds did.
Three forces are pushing this. Washington is issuing enormous volumes of debt, with the national debt approaching $40 trillion. Inflation remains sticky, with oil back near $90 per barrel after a renewed escalation in the conflict in Iran. And AI growth is now being financed by the bond market, with hyperscalers (huge cloud computing companies) competing for the same buyers at the same moment governments need them most. When you crowd two urgent borrowers into one market, patience gets more expensive.
This is global: Japan's 10-year bond yield sits at a three-decade high, and Germany's 30-year bond yield is at levels unseen since 2011. Foreign investors hold roughly a third of U.S. government debt, and better yields at home reduce their appetite for U.S. Treasuries. Long-term interest rates are increasing, and once up, they can take a long time to come back down.
What’s happening with the proposed 50% tariffs on Canadian goods?
Canada spent the week negotiating under a gun. President Trump invoked Section 338 of the 1930 Tariff Act, a provision never used to impose tariffs before, threatening 50% on roughly $20 billion of Canadian goods covering autos, alcohol and dairy. It applies whether or not goods qualify under the Canada-United States-Mexico Agreement (CUSMA). Prime Minister Carney called the talks intense and delicate, spoke with Trump twice, and hours before the midnight deadline, the tariffs were paused for three days, pending a final deal.
Let’s keep the economics in proportion. The affected goods represent about 5% of Canadian exports to the U.S., and one estimate puts the average effective tariff rate rising to 6.27% from 4.68%. Real but survivable. With Trump reaching past every modern trade tool to a 1930s statute that ignores CUSMA entirely tells you how the 2026 CUSMA review may go. Markets didn't care and with good reason. The S&P/TSX Index was at near record levels all week.
How did higher bond rates affect equities?
The increase in bond yields affected equities exactly where it should: the chip industry. The mechanism is arithmetic: higher long rates compress the value of distant cash flows, and no group is more exposed than semiconductor manufacturers. And there is a second turn of the screw here: AI borrowing is helping push yields up, and those same yields bring AI valuations down. AI investment is now financing its own headwind.
By Wednesday, the U.S. Treasury doubled its debt buyback program, and long yields dropped by 10 basis points (0.1 of a percentage point). Health care and cyclical stocks (companies whose performance rises and falls with the economy) were the biggest winners, while chip companies fell.
What can we expect from Jackson Hole?
The Jackson Hole Economic Symposium (an annual gathering of central bankers in Wyoming) arrives next week, which will be U.S. Federal Reserve (the Fed) Chair Kevin Warsh's first. The Fed committee is openly split on whether to make a rate change, and long yield rates are telling him the market has its own view on inflation. After a week when the bond market did the talking, the question is whether equity valuations built for cheap capital can continue in a world where 30-year Treasury yields say capital is not cheap anymore. Listen to last week's podcast for more details on our view of that situation.
And listen to the latest podcast from the IG Investment Strategy Team for further insights.
