Rising Rates and AI Drive Shifts in Global Financial Markets

Global financial markets are grappling with a dual challenge: rising interest rates and debt sustainability. PGIM notes that resilient economic growth, expensive energy costs, and further central bank tightening are putting pressure on government finances, especially in Europe. Meanwhile, BlackRock points out that long-dated US Treasury yields have reached multi-decade highs, despite softer-than-expected US Personal Consumption Expenditures (PCE) inflation readings released on 30 September 2026. These readings reduced immediate pressure for another Federal Reserve rate hike but did not alleviate the structural forces keeping borrowing costs elevated.

Asian fixed income markets have shown relative resilience compared to the global repricing. Eastspring Investments reports that Asian government yields rose much less than US Treasury yields over the previous month, and Asian credit has outperformed US corporate bonds year-to-date. The correction has improved starting yields and carry, but Eastspring advises selective exposure rather than broad duration investments.

Artificial intelligence (AI) infrastructure financing is expanding into public infrastructure and local credit markets. BlackRock estimates that AI-related municipal-bond issuance could reach USD11 billion in 2026, though this is still less than 2% of expected overall US municipal issuance. A key credit question is who will bear the cost of power, transmission, water, and other infrastructure required by data centers.

Citi Wealth highlights cybersecurity as a second-order beneficiary of AI, with Gartner forecasting that security spending for AI systems could grow at roughly 65% annually from 2026 to 2028. This growth rate is around five times the expected growth rate of overall cybersecurity spending, offering opportunities to participate in AI adoption without needing to pick specific models or platforms.

Equity exposure is broadening, but quality remains central. Citi's Global Investment Council increased exposure to Japan and US large caps while reducing securitised fixed income. Japan offers improving economic momentum and strong earnings-revision cycles, while US large caps provide high interest coverage and strong earnings growth. BlackRock sees China moving up the manufacturing value chain but cautions that industrial scale does not automatically translate into attractive shareholder returns.