The world is moving from a regime of deflationary globalization to a regime of geopolitical inflation

Investors around the world continue to act as if the AI ​​boom is more important than the bond market. And they are giving US President Donald Trump the opportunity to counter the high gas prices with record performance on Wall Street – where the richest 10% of households own 90% of the stock market. The moment of truth has come, as they may soon discover that the opposite is true. The biggest threat to Asian stocks is no longer just tariffs, a Chinese slowdown or even geopolitical tensions, but the collapse of the “zero interest rate world” that made the entire post-2008 investment architecture possible. Bond markets are now starting to dominate the AI ​​“trade”.

Geopolitical Inflation and Deflationary Globalization

For more than fifteen years, global markets have operated within a system based on extremely low government bond yields, cheap money, and structurally low inflation. Central banks have so distorted the value of money that investors have increasingly been pushed into stocks, technology companies, and speculative assets simply to secure returns. But this framework is now beginning to unravel. The world is moving from a regime of deflationary globalization to a regime of geopolitical inflation. Globalization has reduced labor costs, extended supply chains, reduced production costs, and allowed central banks to maintain extremely low interest rates for decades. However, this model is being dismantled under the pressure of

• tariffs,
• industrial policy,
• increased defense spending,
• economic protectionism in supply chains, and intensifying geopolitical competition.

Markets continue to underestimate how profound and historic this transition is. US Treasury yields are rising sharply again. The 10-year US Treasury yield hit 4.631%, its highest level since February 2025, while the 30-year yield topped 5.15%. However, the most significant development is in Japan. The 30-year Japanese government bond yield topped 4.2% for the first time in history, while the 10-year yield is now at its highest level since 1996. Most investors have yet to grasp the significance of this shift and have not factored it into their investment behavior. Japan has been exporting deflation to the global economy for decades. The extremely low yields on Japanese bonds have been driving huge amounts of institutional capital into foreign government bonds, US Treasuries, emerging market debt and international equities. In this way, Japanese liquidity has become one of the hidden pillars of the modern financial system. But now the tide is turning. Japan is no longer exporting deflation, but is starting to export higher returns to international markets. This could fundamentally change the structure of international capital flows. If Japanese insurance companies and pension funds can now earn substantial returns at home, they do not need to take on the same level of risk abroad.   Even a partial repatriation of Japanese capital could significantly reduce international liquidity. Asian markets are particularly vulnerable to this shift, given their focus on the creation of tech ecosystems, export dependence, and energy vulnerability. Tech stocks in Taiwan and South Korea continue to be valued as if the abundant liquidity environment of the past decade still existed. The AI ​​rally has created the illusion that earnings growth can indefinitely outweigh rising government borrowing costs. But history shows that bond markets always win this battle. Today, investors can earn returns of more than 5% on long-term U.S. Treasuries, with significantly less risk than many stocks that are priced at optimal levels. This is changing the global allocation of capital. The concentration of gains in a narrow circle of AI-linked stocks has masked the growing fragility of the broader market. Expensive growth assets are still based on assumptions formed in the era of “free money.” Bond markets are now starting to unravel those assumptions.

The role of the conflict in the Middle East

The conflict in the Middle East is further accelerating this process. Brent crude has risen above $110 a barrel as the war with Iran intensifies and the risks to Gulf energy infrastructure increase. Asia remains particularly vulnerable because it is heavily dependent on imported energy. Japan, South Korea, and India absorb inflationary shocks through energy prices much more readily than the United States. Higher oil prices are quickly passed on to production and transportation costs, food inflation, and consumer demand. At the same time, governments are now borrowing on a wartime scale. Japan is reportedly preparing new debt issuance to finance emergency fiscal spending related to the conflict. The United States continues to run huge deficits despite high interest rates and persistent inflation, while Europe is also increasing defense spending as fiscal pressures mount.  

The post-2008 certainties are over

Investors are now beginning to question whether sovereign debt paths remain sustainable in an environment of structurally higher interest rates. That’s why, according to the analysis, the bond market decline matters far beyond fixed income markets themselves. The investment model of the post-2008 period was based on the assumption that liquidity would remain abundant, inflation would remain under control, and capital would continue to be cheap. Bond markets are now challenging all three of these assumptions at once. Some Asian economies may be better positioned to adapt to the new environment. India continues to benefit from its demographic momentum, domestic consumption, and expanding industrial production, while Indonesia and Vietnam are attracting investment related to the diversification of supply chains. At the same time, Singapore may further strengthen its role as a financial safe haven in times of geopolitical instability. However, broader Asian markets remain highly sensitive to international liquidity conditions, sovereign borrowing costs and the strength of the dollar. The era of “free money” inflated almost every major asset class at the same time. The regime that succeeds it will be much more selective, much more volatile and much less forgiving. Investors who continue to treat Asia as if there is still infinite liquidity may end up positioning themselves for a world that will no longer exist.