Stock market today: Dow, S&P 500, Nasdaq fluctuate as Treasury yields retreat, AI trade regains momentum

US bond yields have surged upward over the past month, as yields on both the 10-year Treasury and 30-year Treasury have reached levels not seen since 2002, surpassing 2007 high-water marks in the lead-up to the financial crisis.

One source of upward pressure, argues Macquarie’s Thierry Wizman, is not just the impact of the Iran war on energy markets but also uncertainty about when it will end or what the conflict will look like going forward.

“The perception that global conflict is endemic, may also be causing long-term inflation expectation to stay elevated,” Wizman wrote to clients.

The uncertainty factor for investors centers around the midterm elections. While President Trump has said he expects the war to wrap up shortly after the US midterms, the president has also said he is considering a major renewed bombing campaign after the elections, which would likely push the conflict back into “hot war” territory.

That makes it difficult for investors to evaluate what Wizman says is a critical component: the conflict’s impact on government spending. At face value, the shuttering of the Strait of Hormuz and attacks on energy infrastructure throughout the Gulf region have sent energy prices soaring, depressing bond prices as investors price in higher inflation rates for longer. But wars are also expensive to fight.

The latest figures submitted to Congress by the Pentagon say the US government has so far spent at least $43.6 billion, though outside research institutions posit the actual sum could be far higher.

“We’ve highlighted before how the US-Iran conflict is one of the culprits behind higher bond yields, not just because it is associated with higher inflation (through an adverse supply shock) but because it is associated with a higher deficit and larger borrowing needs,” Wizman wrote.