Interest rate hike expectations reignited, "global asset pricing anchor" dances! AI super bull market faces "stress test" again.

The price of US Treasury bonds continues to fall, expected to reach the largest decline in over two weeks, mainly due to the recent escalation of tensions between the US and Iran, which has significantly raised oil prices and intensified market expectations for the Federal Reserve to return to a hawkish interest rate hike process this year. From the current market trading context, it is difficult to say that the upward trend in US Treasury yield curve has ended, especially the three major factors behind the upward trajectory of long-term US Treasury yields of 10 years and above - the return of inflation risk premium, upward movement of real interest rates, and increasing pressure of debt yield and term premium, all show no significant signs of easing. The US 10-year Treasury bond yield, known as the "anchor of global asset pricing," after continuous decline in the past 7 trading days, showed an upward trend on Tuesday, rising 4 basis points to 4.48% in pre-market trading. Earlier this month, international oil benchmark - Brent crude futures prices rose to above $98 per barrel for the first time. On May 19, the 10-year US Treasury yield surged violently to 4.7%, hitting the highest level since January 2025, briefly disrupting the super bull market dominated by AI computing power and even causing a momentary setback in the strong momentum of global stock markets. This week, the US military intercepted ballistic missiles and drones targeting neighboring countries in Iran, and launched airstrikes on a Revolutionary Guard communication tower in the southern part of Iran's Qeshm Island, while Iran began attacking the US Navy's Fifth Fleet, putting the US-Iran ceasefire agreement at the brink of collapse and reducing the Hormuz Strait shipping channel - a critical transport route for one-fifth of the global oil and natural gas flow, to any possibility of short-term opening. The shadow of Hormuz has raised inflation expectations, and the likelihood of a Fed rate hike has soared to 85%. The sustained high oil prices, along with signs of resilience in the US labor market and consumer spending, support a brighter outlook. Economic data reflecting the optimistic trend in the US labor market, announced on Tuesday, significantly backed up the market's betting that the Fed's next move will be a rate hike. Interest rate swap contracts tied to the Fed's monetary policy meeting date currently show an 85% probability that the Fed will choose to raise rates by 25 basis points by the end of the year (December), far exceeding the 60% from last week. As shown in the chart above, US Treasury bonds are expected to have the largest decline in over two weeks - tensions in the Middle East have escalated in recent days, causing oil prices to surge and US Treasury yields to return to an upward trend (yields move opposite to bond prices). Bond market traders are awaiting more labor market data. Economic data released on Tuesday showed that job vacancies in the US unexpectedly reached the highest level in nearly two years. US ADP employment data and ISM US services data will be released later that day, while the May non-farm employment data will be released on Friday night Beijing time. ING Groep NV's senior strategist team, including Padhraic Garvey, said in a report to clients: "After the significant outperformance of job vacancy data on Tuesday, any optimistic economic growth data in the US may have a greater impact on market trading trends." In addition, the US May CPI inflation data will be released next week. According to a survey of economists, economists unanimously expect the inflation data to rise to 4.2%, significantly higher than April's 3.8% - the fastest growth rate in three years. The April data was driven by a sharp increase in gasoline prices, highlighting the widespread impact of high energy costs from the Iran war on US inflation. Prior to the June 17 Fed policy meeting, some policy makers from the Fed may provide key clues about the monetary policy path. Officials Michael Barr and Lorie Logan, who will have voting rights on the Fed's FOMC monetary policy in 2026, are set to speak. Traders will closely monitor whether they echo the views of one of the Fed's hawks, Cleveland Fed President Beth Hammack, that the Fed may need to take action to raise rates quickly to address rising inflation. With the "anchor of global asset pricing" dancing, overvalued AI tech stocks are entering a period of real profit validation. With the 10-year US Treasury bond yield hovering near the important threshold of about 4.5%, it is difficult to say that the upward trend in the yield curve has ended. Oil prices have risen to over $98 per barrel due to tensions between the US and Iran and uncertainties in the Hormuz Strait, while job vacancies in the US have reached a near two-year high, prompting the market to once again bet that the Fed's next move may be a rate hike, not a rate cut. Furthermore, the pricing of a 25 basis point rate hike within the year in the swap market has risen from 60% last week to 85%, indicating that the upward trend in yields is not solely driven by inflation trades but a combination of "oil price shock + US labor market resilience + Fed turning hawkish again + continued rise in term premium." There are three main drivers behind the rise in long-term US Treasury yields. The first is the return of inflation risk premium: the war in Iran has pushed up energy prices, and inflation is expected to rise from April's 3.8% to 4.2% in May, forcing the bond market to demand higher compensations. The second is the upward movement of real interest rates: the AI capital expenditure wave brought by US tech giants issuing debt, trends in re-industrialization, financing related to energy infrastructure construction, and fiscal deficits have collectively raised capital requirements, leading the market to doubt the return to low interest rates of the 2010s, especially as AI-related investment frenzy may now be factored into bond pricing, as capital expenditures of trillions of dollars in the coming years may further raise real interest rates. The third is the pressure from supply and term premium: worsening US fiscal deficits, further widening expectations of long bond issuances, expectations of "tapering" under Powell's leadership at the Fed, and changes in overseas buying volumes, making long-term yields more sensitive to inflation and policy uncertainties. For global tech stocks, cryptocurrencies, and other risk assets, the key threshold is roughly in the range of 4.5%-4.8% for the 10-year US Treasury bond yield. Technical analysis data shows that if the 10-year Treasury bond yield breaks through the range of 4.70%-4.80%, it may confirm an upward trend in yields; as risk-free rate indicators continue to rise, stock risk premiums will be compressed, significantly limiting the expansion of stock valuations. This means that as long as the 10-year yield remains near 4.5%, the market can rely on the profits from the AI capital expenditure infrastructure boom, supported by AI-related earnings upgrades and risk appetite; but if yields effectively break through 4.70%-4.80% and even approach 5%, high valuation tech assets related to AI will face stronger discount rate shocks. According to some Wall Street veteran bond market strategists, even if the US and Iran reach a peace agreement for a period of time and the Hormuz Strait reopens, market tightening expectations and the 10-year US Treasury bond yield, often referred to as the "anchor of global asset pricing," or the longer-term yield curve, may not necessarily quickly fall back, mainly because the current upward trend in long-term yield curve is not solely driven by inflation expectations, but more by the rise in real interest rates, growing concerns about the sustainability of US debt, and the surge in capital market financing demand fueled by AI investment frenzy. The long-term US Treasury bond market is shifting from a large-scale "temporary inflation shock driven by geopolitical conflicts" to a structural high yield curve pricing driven by "fiscal, AI financing, upward movement of real interest rates and neutral rate." While a peace agreement may ease risk premiums and oil shocks, it will not automatically resolve deficits, debt supply, AI financing competition, and the reversal of global saving-investment balance. These potential trends also mean that as discount rate on the denominator end of DCF rises, high valuation tech stocks closely linked to AI will face long-term "repricing pressure." The 10-year US Treasury bond, as the risk-free rate anchor in the DCF stock valuation model, once it remains high, the super bull market driven by AI will not necessarily end, but will face temporary downward pressure, and may further transition from a "valuation expansion bull market" to a "earnings validation bull market." If corporate profits are strong enough, such as AI leaders continuously realizing profits, stock prices may continue to rise; but the margin of error in valuations will decrease, and once there are disturbances in profit expectations, AI capital expenditure returns, oil prices, or fiscal deficits, the market will quickly reprice through higher discount rates and higher risk premiums. Recently, Morgan Stanley's strategy team said that after the long-term US Treasury yield entered the "danger zone," the overall US stock market still relies on AI and strong earnings but that truly resilient risk assets will need to have strong AI-related revenue paths/production efficiency real profits, high free cash flow, pricing powers, low leverage, and CKH HOLDINGS in AI-related revenue/real profit growth paths.