Weekly market commentary

The supply chain disruptions from the Middle East conflict and the accelerating AI buildout have caused some of the sharpest moves in long-term bond yields across developed markets. U.S. 30-year bond yields hit two-decade highs above 5% last week, up 40 basis points since the start of the war. We see our diversification mirage theme playing out in real time as bonds don’t cushion portfolios against risk asset selloffs. We favor diversifiers such as hedge funds and private markets.

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Cross-asset performance, Feb. 27-May 22, 2026

The selloff in long-term government bonds is a reminder that traditional portfolio hedges are proving less reliable today: Since the onset of the Middle East conflict, returns on U.S. 10-year Treasuries have been negative, driven by energy supply disruption concerns adding to already sticky inflation and persistent fiscal deficits. Stocks and long-term bonds have increasingly sold off together as these concerns dominate markets. But pressure on traditional diversifiers hasn’t been confined to bonds: gold, touted as a portfolio diversifier that has sometimes worked in the past, has slid 15% since the conflict began, partly due to crowded positioning. See the chart. This underscores how long-held safe havens can become unreliable hedges. We think diversification is harder to achieve – thus the mirage – and that’s why investors need to diversify their diversifiers, in our view.

The Mideast conflict has triggered a broader reset in interest rate expectations amid fears that supply chain disruptions would add to already sticky inflation. The shift has been drastic: markets went from expecting rate cuts before the conflict to now pricing in Federal Reserve and Bank of England rate hikes. More recently, another factor has pushed yields higher: Investors are now demanding more term premium – or greater compensation to hold long-term government bonds – our long-held view. The term premium embedded in U.S. 10-year yields is rising back near its highest levels in 12 years, according to New York Fed estimates of the ACM model. The changing base of the U.S. Treasury market is also a factor. The make-up of investors is shifting toward short-term, leveraged players quick to sell – and push up long-term yields – in volatile markets. This validates our preference for short- and medium-term U.S. government bonds over long-term bonds.

Hunting for new diversifiers

These developments require finding ways to shield portfolios against higher inflation. The macro regime is shaped by mega forces as stubborn inflation and higher rates become structural features. Geopolitical fragmentation adds to the risk of ongoing supply disruptions, while persistent fiscal deficits in major economies pile pressure on long-term borrowing costs. At the same time, the AI buildout is driving sustained investment demand across the economy, further stoking inflation and demand for capital. That’s one of the reasons we favor inflation-linked bonds on strategic horizons of five years or longer.

These developments also reinforce why new sources of portfolio diversification are needed. For strategic horizons, we like hedge funds and private markets as diversifiers less reliant on broader market moves and instead tied to manager skill. We favor macro and absolute return hedge fund strategies that can better diversify portfolios when macro shocks hit risk assets broadly. In private markets, we like infrastructure equity with cash flows often linked directly to inflation, as well as private credit tied to AI-driven investment demand. On a tactical horizon, the AI mega force underpins our pro-risk stance, supported by strong corporate earnings growth and balance sheets. Earnings growth has offset the drag from higher interest rates and helped stocks absorb the sharp rise in yields – though we’re monitoring this key risk to our view.

Our bottom line

Traditional portfolio diversification is challenged today, underscoring the need for broader diversification sources. We stay pro-risk on solid corporate earnings and the AI theme.

Market backdrop

U.S. 30-year Treasury yields hit a 19-year high before easing as the global bond selloff paused. The S&P 500 was little changed near record highs as SpaceX set out its plan for what could be a record-sized stock listing. The S&P 500 has added 8% since the Mideast conflict began. European stocks outperformed with a 3% gain. Brent crude oil fell about 5% on hopes for a resolution to the conflict but is up about 70% this year. Energy flows through the Strait of Hormuz remain very limited.

We eye U.S. core PCE for signs that higher energy costs are feeding through to underlying inflation. This comes as the Fed already faces a tougher trade-off between reining in inflation and supporting growth. We have been positioned for such an environment, underscored by our caution on long-term government bonds. We also eye Japan CPI data for evidence that inflation pressures remain persistent globally.

Read our past weekly market commentaries here.