Bond Markets Face Volatility as Geopolitical Tensions Rise and Hong Kong Advances Tokenization Efforts

Renewed U.S.-Iran fighting sends U.S. stocks tumbling and bond yields rising, with the 10-year yield near 4.5%. The volatility comes amid signs of a weakening U.S. economy outside the AI sector, including falling CEO confidence, a deteriorating housing market, and a personal savings rate at a four-year low. The market's high valuations, with the S&P 500's CAPE ratio at a century high, face increasing headwinds.

U.S. equity market valuations

• ▪On June 3, 2026, the Dow Jones Industrial Average fell over 600 points (1.21%) and the S&P 500 dropped 0.74%
• ▪Renewed fighting between the U.S. and Iran, including missile attacks and U.S. "self-defense strikes," is causing market volatility
• ▪The S&P 500's Cyclically Adjusted Price-to-Earnings (CAPE) ratio reached 39.6x in May 2026, tied for the second-highest level in a century
• ▪The 10-year U.S. Treasury yield rose to around 4.49%, and Brent crude oil prices jumped 2% to about $98 a barrel amid geopolitical tensions

CEO confidence decline

• ▪The Conference Board’s CEO Confidence Survey for Q2 2026 dropped to 47 from 59 in Q1, with six-month expectations also sliding to 46 from 57
• ▪Over 30% of companies plan to cut staff in the next year, and 32% intend to reduce headcount over three years due to the impact of AI

Housing market deterioration

• ▪In April 2026, new U.S. home sales fell 6.2% sequentially, and the inventory of unsold homes expanded to a 9.4-month supply
• ▪U.S. mortgage applications for the week of May 22, 2026, plunged by 8.5%, declining sharply in four of the past five weeks

Labor market weakness

• ▪Only 4% of businesses plan to raise wages by more than 5% in the coming year, a sharp drop from 23% in mid-2022
• ▪Only 7% of CEOs report difficulty finding qualified workers, down from 66% in early 2022

Inflation measurement Fed policy

• ▪Personal consumption expenditures (PCE), the Federal Reserve's preferred inflation measure, accelerated to a 3.8% annual pace in April 2026
• ▪The "super-core" PCE measure, which excludes energy and housing services, slowed to a 0.1% month-over-month increase in April 2026

Economic contraction outside AI

• ▪The U.S. personal savings rate fell to 2.6% in April 2026, a four-year low
• ▪A significant portion of the U.S. economy, including housing and nonresidential construction, contracted at a 1.9% annual rate in Q1 2026
• ▪Excluding the AI spending boom and a drop in the savings rate, real U.S. GDP would be running at a -0.6% year-over-year rate