James Brodie
Head of Learning & Development, Flux
Global Bond Crisis Re-emerging, Markets In Unusual Macro Regime, AI Capital
Bond stress returns as inflation surges; yields spike globally; stagflation fears grow amid AI boom, commodities rally and war risks
The global bond crisis is re-emerging.
US inflation jumped to 3.8% in April, that is the highest level in 3yrs, and the OIS now priced 8bp hikes by the Fed this year. Inflation has gone from 2.4% y/y to 3.8% in 10 weeks. The trigger was geopolitical, but the pass through is now broadening into food at home (+0.7% m/m), shelter, services and goods Real wages are negative, the Fed is boxed, and rates repriced hard.
Japanese government bond yields are surging to historic levels: The 30-year JGB yield is up to 3.835%, the 2nd-highest on record and on track for the highest weekly close since the bond was introduced in 1999.
UK 30yr rates are now at 29-year highs. Gilts are now the worst per performing G7 government bonds over the past 2 months. While yields on 10y gilts have risen well above 5%, reaching their highest level since 2008. A 2012 investment in a UK long-duration government bond ETF, with maturities of 15 years and over, would have left you with a loss of 5%. So after lending your money to the UK government for nearly 15 years, you didn’t get rewarded at all. You lost money. But it gets much worse. After inflation, the loss jumps to a staggering 35%. Every GBP 100 invested in that ETF would now be worth barely GBP 65 in purchasing power.
Markets are entering a highly unusual macro regime where equities, gold, commodities, and materials are all rallying at the same time despite increasingly hawkish central banks. Historically, this combination has only appeared during periods such as wartime booms, speculative bubbles, or stagflationary environments. The current backdrop blends AI-driven technology optimism, geopolitical and resource competition, inflationary pressures, and strong nominal GDP growth. A major secular rotation is developing toward materials, commodities, emerging markets, and small/mid-cap stocks, driven by AI infrastructure spending, defense CAPEX, housing shortages, resource nationalism, and potential long-term RMB appreciation.
At the same time, market concentration risk is becoming increasingly extreme. Materials stocks remain deeply underowned at just ~2% of the S&P 500, while the “AI Big 10” now represent roughly 40% of the index - levels comparable to past concentration extremes such as the Nifty Fifty, 1980s Japan, and the dot-com era. The biggest threat to the current bull market would likely come from a sharp rise in bond yields and further central bank hawkishness. Investor flows already suggest rising caution beneath the surface, with significant inflows into cash and investment-grade bonds, while emerging markets, China, and European equities continue to experience outflows. (Charts 1&2, BofAmerica Global Research)
….Copper prices have surged to a record $6.58 per pound, now up +75% since October 2023 and over +40% in 12 months. The surge comes amid tight supply, declining inventories in China, and surging demand for data centre construction. Furthermore, supply disruptions at the world's 2nd-largest copper mine in Indonesia are adding to the pressure. Meanwhile, China's exports jumped +14% YoY in April, led by booming clean-tech shipments, components that are materially copper-intensive, tightening the market even further.
The US is pouring more capital into AI data centres in 6 years (~$930B) than the inflation-adjusted cost of the Marshall Plan, Apollo, Manhattan Project, and the Interstate Highway System - combined. Meanwhile: AI ≈ 45% of the S&P. Energy ≈ 4%. Everyone is overweight the thing that needs power. Underweight the power. (Chart 3, @ronstoeferle)
Electricity prices another new all-time high. We need to add more data centres to a 75-year-old grid! (Chart 4, Bureau of Labour Statistics)
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