Bond Bears vs. AI Bulls: Inflation Fears Clash With Growth Optimism 

Executive Summary 

Stocks and bonds up on the week (bond prices up, yields down). The MSCI EAFE and MSCI Emerging Markets indices outperformed the S&P 500. The best performing sectors in the S&P 500 were utilities, health care, and REITs. Across U.S. Russell style & market cap indices, small-cap growth did the best, but the value factor led more broadly. As for fixed income, the 10 yr. treasury yield was down on the week to 4.56%, and the 2year – 10 year treasury yield spread flattened to +44 bps. The best performing parts of the bond market were mortgage backed securities MBS, investment grade corporates, and high yield bonds. High yield bond spreads were down on the week at 260 bps, still well-off 2025 highs of 453 bps. 

Sentiment improved later in the week after reports of potential progress in negotiations with Iran pushed oil prices back below $100 per barrel and helped steady interest rates.  Inflation expectations as measured by one-year breakeven rates are currently at 2.91%, down 21 basis points (bps) on the week and have effectively been tracking oil prices. This is also the lowest level for one-year breakeven rates since January 21 of this year. Two-year breakeven rates are 2.77%, down 12 bps on the week. Finally, five-year breakeven rates are 2.62%, down 8 bps on the week, and they have been hovering between 2.60% and 2.70% for the last three months. These numbers represent the bond market’s pricing of annualized inflation out one, two and five years. 

Key Takeaways 

1. Treasury Yields Up and Down, Touching Levels from the Mid-2000s 

U.S. Treasuries generated positive returns through most of last week, as yields rose across most maturities early in the week before largely reversing course on Wednesday after President Donald Trump said that the U.S. was in the “final stages” of talks with Iran. (Bond prices and yields move in opposite directions.) After ending the prior week at about 4.6%, the yield on the benchmark 10-year U.S. Treasury note hit a midweek high of 4.69% before retreating to around 4.56% as of Friday afternoon. . The 30-year Treasury yield touched 5.19% on Tuesday, its highest in nearly 19 years.  Data from Freddie Mac showed that the average interest rate for a 30-year mortgage rose to 6.51% last week, up from 6.36% in the prior week and the highest level since August acting as a break on potential housing inflation risks.  

Why it matters: Several forces are pushing rates higher, including rising oil prices, Fed commentary, and recent inflation data. Interest rates are currently at multi-decade highs, and the market is monitoring the potential for another leg higher. 

2. Federal Reserve Commentary Suggests Rate Hikes are Possible 

Minutes from the Fed's April meeting reinforced that interest rates may stay higher for longer. The meeting included several dissents, and multiple officials expressed a desire to step back from any bias toward cutting rates. The message was clear: rate hikes are now on the table. Investors had already begun lowering their expectations for cuts. While the market expects the Fed to hold steady over its next three meetings, it now anticipates a possible rate increase at either the October or December meeting.  

Why it matters: The Fed’s next meeting takes place in mid-June. The setup: the conversation has shifted from when the Fed will cut rates to whether it should raise rates. 

3. Geopolitical Headlines Continue to Impact Stocks 

Stocks rebounded midweek as reports of easing tensions with Iran pushed oil prices lower and lifted investor sentiment. Crude oil, which had spiked on geopolitical concerns, fell from near $110 to below $100 per barrel. The decline eased fears that higher energy costs could add to inflation and keep interest rates elevated. Stocks responded positively as rates eased, with the S&P 500 and Nasdaq trading back toward record highs.  

Why it matters: The quick midweek reversal shows how closely markets are tracking both energy prices and interest rates right now. Both are likely to keep influencing the direction of markets in the near term. 

4. Major Stock Indexes Continued to Set Highs Despite the Rally Remaining Narrow 

The largest companies continued to lead the market, helping the S&P 500 stay near a record high despite rising interest rates. Technology stocks have driven most of the gains since late March, with strength in companies tied to artificial intelligence. While most of the market has taken part in the rally, leadership has narrowed in recent weeks. Interest-rate-sensitive areas like smaller companies have traded lower as rising rates weigh on them.  

Why it matters: Major stock indexes remain near all-time highs, but the rally is slowing and becoming more selective as markets digest the strong gains since late March. 

5. Nvidia’s Earnings Results Signal Strong Demand for AI Infrastructure 

Nvidia's earnings release was the week's big event. Investors watch its results closely as a gauge of demand for AI-related technology. The company reported roughly $81.6 billion in revenue, up about +85% from a year earlier, along with strong earnings and an $80 billion stock buyback.  

Why it matters: The report suggests that spending on AI infrastructure remains strong and is still growing. At the same time, expectations for the company and the broader AI industry are already high, which means future results will need to keep impressing to justify those expectations.