Following Money Through the Global Markets
The Strait of Hormuz
Trade disruptions in the Strait of Hormuz have received a lot of press lately, and for good reasons. Roughly a quarter of global oil supply and a fifth of global liquid natural gas exports moved through the Strait of Hormuz in 2025. Due to geopolitical conflicts, trade through the strait has nearly halted in 2026. The Executive Director of the International Energy Agency has called the recent trade disruptions “the greatest threat to global energy security in history.” (IEA)
Trade Disruptions in the Strait of Hormuz
Source: Statista
Although there was some relief from mid-June through mid-July and oil prices are below peak levels of the year, they remain well above pre-conflict levels. Until a path to open transit becomes clear, we can expect oil and natural gas prices to remain elevated. That may translate into higher prices at the pump for regular Americans (EIA), but it also has implications for the broader economy and the US government.
Oil Prices Beyond the Gas Pump
Oil is an input cost for almost everything in the economy which means that higher energy costs ripple through most parts of the global economy from transportation to manufacturing and agriculture, and ultimately to grocery and retail prices. (The FRED Blog) This inflationary pressure from persistently high energy costs may also mean higher costs for corporations and governments.
The Relationship Between Oil Prices and Food Costs
Source: FRED | St. Louis Fed
How Inflation Affects Borrowing Costs
If inflation stays elevated for long enough, central banks like the Federal Reserve may take action to fight inflation. One tool available to policymakers is to raise interest rates. In the same way that markets price in expectations of changes in the oil supply, expected changes in interest rates are priced into the markets before central banks ever take policy action. The expectation alone may be enough to move markets, and this leads to another cost increase.
Bond investors care about future inflation. Higher expected inflation generally means investors demand higher yields. Higher yields mean governments pay more interest when they borrow making it more expensive to finance government operations. To the average investor, treasury yields may seem esoteric. However, all interest rates are related, from US Treasuries to car loans, credit cards, and mortgage rates. Higher rates in the economy make it more expensive for governments, businesses, and families to borrow. If bond yields get high enough, they may even influence how much investors are willing to pay for stocks. (Morningstar)
How AI Factors In
The AI buildout doesn’t just consume electricity, it consumes capital. Building AI data centers requires enormous capital expenditure. Many corporations are now financing their AI infrastructure projects through bond markets. So far in 2026, corporations have issued $1.5 trillion in bonds which is a 36% increase from corporate bond issuance in 2025. (Bloomberg)
AI Capex Spending in 2026
Source: Statista
More corporate bond issuance adds to the overall supply of debt securities. Since governments are also financing their long-term expenses in the same markets as corporations, this creates competition for a finite pool of investor dollars. In other words, a level demand for bonds with an increasing supply puts downward pressure on bond prices. Bond yields and bond prices have an inverse relationship, so as bond prices decrease, bond yields rise. An argument can be made that the AI boom and corporate borrowing may increase the cost for the federal government to finance its debt.
How Does This Affect Investors?
To sum up, restricted oil and gas supply is creating inflationary pressures globally. These inflationary pressures are raising the cost of borrowing for everyone, including the federal government. At the same time there are more borrowers chasing the same amount of investor dollars, which puts downward pressure on bond prices and upward pressure on bond yields. Additionally, more leveraged spending by the government may also create inflationary pressures. (Yale Budget Lab) Ultimately, US treasury yields are under pressure from multiple sources.
Looking beyond the federal government, these dynamics impact individual investors as well. For bond investors, existing bond prices may fall if interest rates rise. On the other hand, new investment in bonds may become more attractive as yields climb since income on bonds in a portfolio would increase. For stock investors, stock prices can come under pressure when yields rise high enough. When investors can earn more from relatively safe Treasury bonds, they often become less willing to pay premium prices for growth stocks.
Of course, rising bond yields do not necessarily mean that stock prices will fall. For the last 3 years, the 10-year US Treasury yield has been at levels last seen nearly 20 years earlier. Meanwhile, the major stock market indices have continued to reach record highs. For investors, we believe that diversification still matters. We have explored this topic before such as in the articles Models and Mindsets, Does Diversification Still Matter?, and in the video Why Simple Portfolios Work. Historically, stocks have been a driver of long-term portfolio growth, while high-quality bonds have provided income and moderated portfolio volatility over market cycles, as shown in the chart below. While we don’t know what the coming months will bring for the stock and bond markets, investors can control their investment allocations.
The Effects of Portfolio Diversification
What to Watch
As these stories continue to develop, we will be watching several key factors that could influence oil prices, inflation, bond yields, and investor portfolios.
Energy Markets and Geopolitical Risk
Progress toward a durable resolution involving Iran and a return to smoother trade through the Strait of Hormuz would be an important factor to watch. A sustained reopening of energy transit routes could help reduce oil and natural gas prices, which in turn may ease some inflationary pressure.
Bond Supply and Borrowing Needs
Lower borrowing by the federal government or corporations could reduce the supply of new bonds coming to market. Stronger investor demand for bonds could have a similar effect by helping absorb new issuance more easily.
A sustained reduction in geopolitical tensions could also affect government spending needs. If borrowing requirements decline, that could reduce the supply of government bonds and relieve some upward pressure on yields.
AI Infrastructure Spending
AI-related borrowing will also remain important. If large technology companies slow their spending on infrastructure or generate stronger revenue from AI investments and fund more projects from cash flow, the pressure from corporate bond issuance may ease.
Oil markets, AI investment, inflation, and government borrowing will continue to evolve, and their effects may not unfold in a straight line. Because market movements cannot be predicted accurately and consistently, long-term investors may be better served by focusing on controllable factors such as diversification, disciplined allocation, and alignment with their goals, time horizon, and tolerance for risk. If recent developments have raised questions about your investment allocation, reach out to your advisor at Howe & Rusling to discuss whether your portfolio remains positioned for the path ahead.
Disclosures: The information contained herein is provided for educational and informational purposes only and should not be construed as personalized investment advice or a recommendation to buy, sell, or hold any security or to engage in any particular investment strategy. The views expressed reflect the opinions of Howe & Rusling, Inc. as of the date of publication and are subject to change without notice. This material discusses broad economic and market conditions, including energy markets, inflation, interest rates, government borrowing, corporate bond issuance, artificial intelligence infrastructure spending, and portfolio diversification. Any forward-looking statements, projections, or expectations regarding future market conditions, interest rates, inflation, bond yields, energy prices, corporate borrowing, government debt, artificial intelligence investment, or investor outcomes are based on current assumptions and information available at the time of publication. Actual results may differ materially, and no statement should be relied upon as a guarantee or prediction of future events. Investing involves risk, including the potential loss of principal. The value of investments may fluctuate due to market conditions, interest rate changes, inflation, geopolitical developments, economic conditions, issuer-specific factors, and other risks. Bonds are subject to interest rate risk, credit risk, inflation risk, reinvestment risk, and liquidity risk. When interest rates rise, bond prices generally fall. Equity investments are subject to market volatility and may decline in value. Diversification and asset allocation do not ensure a profit or protect against loss in declining markets. References to historical market conditions, interest rate levels, bond yields, inflation, stock market performance, or other economic data are provided for context only and are not indicative of future results. Past performance is not a guarantee of future results. References to third-party sources, including but not limited to the International Energy Agency, International Monetary Fund, Federal Reserve Economic Data, Morningstar, Bloomberg, Statista, and Yale Budget Lab, are provided for informational and educational purposes only. Howe & Rusling, Inc. has not independently verified all third-party information and does not guarantee its accuracy, completeness, or timeliness. The inclusion of any third-party reference does not imply endorsement by Howe & Rusling, Inc. or affiliation with the referenced organization. This material does not take into account the specific investment objectives, financial situation, tax status, liquidity needs, time horizon, or risk tolerance of any particular individual. Readers should consult with a qualified financial professional before making any investment decision. Howe & Rusling, Inc. does not provide tax or legal advice. Howe & Rusling, Inc. is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training.
