Government borrowing costs surge on US-Iran war concerns

What happened: Global borrowing costs surged to multi-decade highs on Tuesday, driven by concerns over inflation, government debt, and AI spending. The US 30-year bond yield hit 5.33%, the highest since June 2008. This rise was exacerbated by fading hopes for a US-Iran peace deal, as tensions escalated following the end of a ceasefire. Oil prices climbed due to geopolitical risks, with a cargo vessel reportedly struck in the Strait of Hormuz. Meanwhile, the TSX and European stocks closed weak, with materials, technology, and financial sectors under pressure.

Market impact: Heavily leveraged, high-growth stocks like CoreWeave were rattled, with its stock plunging 11.8% on rising bond yields and oil prices. Higher borrowing costs and geopolitical risks led to a sell-off in Canadian and European equities, particularly in sectors sensitive to economic cycles and input costs. The Dow Jones Industrial Average finished lower despite most of its components rising, as the 10-year Treasury yield climbed to 4.71%.

What to watch next: Investors should closely monitor the US-Iran situation, with any escalation or de-escalation likely to influence bond yields and oil prices. Upcoming economic data releases, such as the US inflation report on September 13, will provide insights into the trajectory of interest rates. Additionally, earnings season is approaching, with companies like Home Depot (reporting on August 23) providing guidance on consumer spending and the broader economic outlook.