by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our views on how rising bond yields are creating new openings in the market, including in private credit, followed by an update on intensifying tensions in Iran. We also cover increasing Congressional scrutiny of Middle East policy, the US troop drawdown in Poland, and the impact of AI on the labor market. As always, we provide a comprehensive roundup of the latest international and domestic economic indicators.

A New Hope: There is a global sell-off in bonds as markets grapple with rising deficit spending and persistent inflation. On Tuesday, the 10‑year US Treasury yield climbed to its highest level in 19 years, while yields in Japan, the UK, and France also rose to multi‑year highs. The move reflects investors stepping back from sovereign debt amid mounting concerns over fiscal sustainability and the cost of funding measures intended to cushion the impact of higher rates. However, the rising uncertainty may prompt a rethink of private credit.

• In the US, the rise in yields reflects investors grappling with several mounting risks at once. A combination of war‑related energy shocks feeding inflation, large fiscal deficits, and a still‑resilient economy has led markets to demand a higher risk premium on government debt. This, in turn, has fueled concerns that the Federal Reserve may need to keep interest rates at current levels for even longer.
• For the rest of the world, concerns center more on expanding fiscal spending alongside a potential slowdown in growth. Governments across Europe and Asia have begun rolling out energy subsidies to help households cope with higher prices. To finance these measures, they are expected to issue additional debt, prompting investors to demand higher compensation to absorb the increased supply.
• However, there have been some clear winners. Rising bond yields have fueled a renewed bid for the AI trade, which investors increasingly view as a relative haven amid higher interest rate expectations. This rotation has supported markets with heavy technology exposure — most notably US large-cap equities, but also South Korea and Taiwan, which remain key exporters of components critical to AI infrastructure.
• Additionally, private credit sentiment may also improve meaningfully as software companies have staged a notable rebound. Software issuers that were effectively written off earlier in the year on “going concern” fears tied to AI disruption are now beginning to stabilize. In particular, large platforms such as ServiceNow, Workday, and Salesforce — initially caught up in the “SaaSpocalypse” narrative — have posted a marked recovery over the past several weeks.
• While higher interest rates create headwinds for the global economy and select sectors, we still see areas that are compelling for investment. AI‑linked equities, though crowded, continue to deliver strong performance. At the same time, private credit and business development companies (BDCs) look attractive in this environment, supported by their floating‑rate debt exposure, meaningful links to a recovering software sector, and the recent re‑rating of many software names.

New Conflict: President Trump has warned that time is running out for Iran to reach an agreement before he authorizes additional strikes. The threat comes as both sides continue to spar over the terms for reopening the Strait of Hormuz. In a show of defiance, Iran has said it is prepared to defend itself against any attack. The growing impasse has prompted regional and global powers to take a more active role in mediating the conflict, while global markets brace for a resolution.

• The president’s latest threat came after he said he had received assurances from China that it would not supply weapons to Iran. His remarks referenced last week’s meeting with President Xi, in which the two leaders discussed issues ranging from trade and intellectual property to AI and foreign policy. President Trump suggested those talks also included a commitment from Xi not to provide arms to Tehran.
• As the president prepares additional measures against Iran, he appears to have helped nudge NATO toward considering a larger role. The alliance has reportedly discussed deploying naval forces to the strait if it remains closed into early July. While there are still no clear signs of the unanimous backing required for such an operation, the debate itself suggests momentum is starting to move in that direction.
• The growing involvement of additional countries has increased the risk that the conflict could widen beyond Iran. China’s role raises the prospect of the war evolving into a proxy confrontation with the United States, potentially driving a further deterioration in bilateral relations if tensions escalate. At the same time, possible NATO involvement could draw European states more directly into the crisis, adding another layer of complexity and heightening the risk of broader regional instability.
• In a world where conflict risks are rising, we expect these conditions to favor hard assets and broad-based increases in defense spending. Precious metals look particularly appealing as non‑US‑aligned countries, including China, seek to hedge their exposure to the dollar. Defense companies, especially in Europe, may also benefit as governments are forced to shoulder a greater share of their own security burden.

Congressional Pushback: There is growing pressure in Washington to bring the US standoff with Iran to an end. On Tuesday, Republicans joined Democrats in clearing a key procedural hurdle that paved the way for a final vote on a resolution to halt the war in Iran. The bipartisan push reflects the conflict’s increasing political unpopularity and could complicate the president’s efforts to secure further concessions from Tehran. That said, we think any such bill is unlikely to become law and will remain largely symbolic.

US Withdrawal: The US military has begun reducing its troop presence in Europe as it seeks to recalibrate its foreign policy posture. This week, Washington canceled the planned deployment of 4,000 troops to Poland, bringing the regional force level back toward its pre‑Ukraine‑invasion baseline and signaling a White House push for Europe to lessen its dependence on US security guarantees. In our view, this shift is likely to spur higher EU defense spending as European governments move toward greater self‑reliance in defense.

AI Job Displacement: A growing number of technology and financial firms are turning to AI to streamline operations and reduce headcount. Standard Chartered’s CEO, for example, has signaled plans to cut nearly 8,000 roles as the bank seeks to eliminate redundancies, while Meta has pursued similar reductions in the name of efficiency. So far, AI‑related layoffs have been relatively contained, but the acceleration of investment in automation raises the risk that job cuts could broaden into other sectors over time.

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