by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on how rising fears over AI are shaping the debate on global policy. We then turn to fixed income, examining the drivers behind the 10-year Treasury yield’s move to 5%. Next, we briefly cover China’s new travel restrictions and the Supreme Court’s ruling on mail ballots. As always, we conclude with a review of recent domestic and international economic data.

AI Fears? A push for a global slowdown in AI development has fueled a broader debate over ways to address geopolitical risks. On Monday, China rejected calls to restrict the use of its models in the US, arguing that it could disrupt the process of global governance of AI. Meanwhile, Canadian Prime Minister Mark Carney called for a global body to oversee AI development, arguing it would help ensure international standards. This debate over a global AI standard marks the first serious attempt at an international framework for the technology.

• Uneasiness over AI safety has led to a push for technological protectionism. Over the weekend, a top Chinese official in Beijing published an article warning that the technology could be abused by hostile forces to wage a propaganda and cognitive war against the government. He specifically referred to US models, including those from OpenAI and Anthropic. His comments followed concerns from Anthropic CEO Dario Amodei, who warned that China’s lead could pose a danger to the US and the world.
• However, there does seem to be a push for some form of international cooperation as a way to ensure AI is created safely. Carney has advocated for a board similar to the Financial Accounting Standards Board, which would create a unified set of governing rules to ensure AI is developed safely. The implication is that a rule-setting board would govern how public and private companies build and test AI models.
• The push toward either more protectionist AI policies or greater global cooperation reflects a world still adapting to the AI age. We think the global economic system may be shifting from one built primarily on trade to one increasingly built on technology. As a result, a dispute could emerge over how different AI models are permitted to operate across countries, particularly as the US and China continue to vie for supremacy in the space.
• The debate over the risks of AI could slow development, whether countries move toward protectionism or a global cooperative governing body emerges. While the latter is preferable, competition between the two largest economies makes the former more probable. This is apt to slow adoption, as it could prevent firms from accessing the lowest-cost alternatives. However, it may provide a boost to software-as-a-service companies, which are more likely to be threatened by the rapid adoption of AI tools.

Treasury Yield Peaks? The 10-year Treasury yield rose above 5% for the first time since 2023. The increase in yields comes as investors price in the possibility of a broadening conflict in the Middle East leading to further supply shocks in energy. This concern compounds the fact that inflation is likely to stay elevated, as government debt issuance and rising AI-related corporate debt continue to flood the market with supply. As a result, there are growing worries over what can be done to bring down global borrowing costs.

• The rise in bond yields comes in response to concerns about Iran and its proxies targeting energy infrastructure throughout the Middle East as it looks to gain leverage against the US. Over the last few days, Iran has used its proxies to broaden the war beyond the Strait of Hormuz. Most recently, the Iran-backed Houthis were able to take control of the Bab al-Mandab Strait and have tightened their grip on the coast of the Red Sea.
• The rise of the Houthi threat has put the US in a bind as it decides whether to expand its operations throughout the Middle East. Saudi Crown Prince Mohammed bin Salman has requested US military support as the kingdom looks to avoid having its oil exports blocked on two fronts. However, the US appears reluctant to provide that support, given its existing commitment to the Strait of Hormuz and unease about the further straining of its military resources.
• Oil markets have been hit hardest, as Saudi Arabia has struggled to export to the rest of the world. The kingdom is currently trying to resume operations at its East-West Pipeline, which has been a key means of selling oil while bypassing the Strait of Hormuz. There is hope that Saudi Arabia can rely on inventories held at one of its storage facilities on the Red Sea, as well as reserves stored in Egypt, but there are concerns that this would only serve as a short-term fix.
• While Treasury yields are elevated, it is important to remember that much of the risk is related to geopolitical tensions in the Middle East. Once there is a final resolution — preferably a reopening of the Strait of Hormuz, on which there has been considerable progress — long-duration bonds should be able to rally in response. In the meantime, however, rates could find considerable support due to oil supply uncertainty.

China Travel Restriction: Beijing has introduced a new travel restriction for civil servants and those working in sensitive industries. The move comes as the government aims to prevent the sharing of state secrets, particularly those related to its AI technology. The rule follows Meta’s blocked purchase of a Chinese AI company. The restriction comes as competition between the US and China over AI continues to heat up.

Mail Ballot Ruling: The Supreme Court rejected the White House’s request to restrict mail ballots for the midterm elections. The decision will allow states to continue sending out ballots in their usual manner. This ruling sets back the Trump administration’s efforts to restrict the use of mail-in voting as a way to ensure election integrity. While the issue is likely to be challenged further, its overall impact on November’s contest for either party is probably inconsequential regardless of the ruling.

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