AI Leverage, US Treasury Yields, and the Strait of Hormuz: The Three Factors Dominating Global Markets This Summer

This summer, global markets have been repeatedly pulled in different directions by three events: the unwinding of highly leveraged AI positions, long-term US Treasury yields hitting a 19-year high during an interest rate cut cycle, and the signing and subsequent tearing up of ceasefire agreements in the Strait of Hormuz.

These three events belong to three different markets and appear unrelated to one another.

On August 10, Goldman Sachs placed them within the same framework: global markets may be switching from "excess savings" to "capital scarcity." AI is burning cash, governments are accumulating debt, and the Strait is constraining physical supply—three forces simultaneously consuming limited global capital.

Meanwhile, central banks, which have spent the past two decades injecting liquidity into markets and suppressing interest rates, find their room for maneuver shrinking.

This assessment does not mean that these three situations will continue to deteriorate indefinitely. However, it points to a critical question: If global capital is indeed becoming more expensive and scarce, is the market prepared? Even if any one of these three issues subsides, the global scramble for capital may not disappear. The extreme volatility of July—characterized by sharp drops and surges in equities, rising US Treasury yields despite rate cuts, and crude oil recovering half its losses in just three days—may not have been an anomaly, but the beginning of a high-volatility cycle.

AI Leverage: Right Logic, Wrong Leverage

Among the three events, the AI leverage unwind exploded first.

Leopold Aschenbrenner, dubbed the "AI Oracle," saw the net asset value of his hedge fund surge by 439% in the first half of the year by using 4x leverage to go long on AI hardware and short software stocks. In July, the Philadelphia Semiconductor Index fell 28.6% in a single month, resulting in losses on both long and short positions. His entire $16 billion public position was offloaded to Citadel—after evaluation, Millennium and Jane Street exited entirely, leaving Citadel as the only buyer on Wall Street.

JPMorgan Chase later warned: Institutions' capacity to absorb AI assets has declined significantly. In future incidents, "only retail investors will be left to provide support."

At the same time, TSMC's July revenue grew 44.7% year-over-year, hitting a record high. The backlog orders for the three major US cloud providers totaled $2.3 trillion. AI demand has not slowed. The direction was correct, but the capital fueling that direction is disappearing.

A more fundamental signal came from NVIDIA. On August 10, Jensen Huang did not launch faster chips, but instead partnered with BlackRock, Blackstone, and four other major asset managers to create a financing platform—customers could no longer afford the chips, requiring NVIDIA to help them secure funding from institutions. The market was unimpressed: the stock price fell that day, and credit default swaps (CDS) approached historic highs.

"Dr. Doom" Jim Chanos noted that this scenario recalls 2008. The market's skepticism is simple: If the essence of a $500 billion deal is "lending money to customers to buy your own chips," how long can this cycle last? A sector that requires hundreds of billions of dollars in financial engineering just to survive is, in itself, proof of a capital shortage.

US Treasuries: An Explanation for the Failure of Rate Cuts

AI is burning cash, and the government is borrowing at record levels.

The Federal Reserve cut rates six times, totaling 175 basis points, yet the yield on 30-year US Treasuries continued to climb, reaching 5.27% on August 1—the highest level since 2007. The market is no longer pricing in the Federal Reserve; it is pricing in US fiscal policy.

US federal debt exceeded $40 trillion in August. Net interest expenditure for FY2026 is projected at $1.039 trillion, surpassing the defense budget for the first time. For every $5 collected in taxes, $1 goes directly to interest payments. With $15 trillion in debt maturing within a year, every percentage point increase in the refinancing rate automatically expands the deficit. The share of US Treasuries held by foreign central banks has dropped from 34% to below 24%.

Goldman Sachs stated plainly: The world has shifted from "excess savings" to "extreme capital scarcity." AI infrastructure requires over $800 billion annually, while re-industrialization and defense restructuring efforts across various countries are advancing simultaneously, leading to a concentrated surge of sovereign debt refinancing needs. These financing demands are colliding with a Treasury market where buyers are retreating. As buyers withdraw and supply expands, yields can only rise.

There is also discord within the Federal Reserve. Chair Walsh significantly reduced forward guidance, stating that "the market has already undertaken most of the tightening work"—implying no urgent need to raise rates, allowing the market to tighten on its own. Cleveland Fed President Hammack publicly disagreed, stating that current rates "do not form a significant constraint" and that "multiple rate hikes may be needed." Goldman Sachs' view is that the Federal Reserve is more of a "passenger" than a "driver."

Aschenbrenner's 4x leverage was fragile not only because of concentrated positions but also because the cost of borrowed money may be rising. The AI capital boom collided with the peak of government borrowing, while central banks no longer have sufficient space to backstop both as they did in the past.

Strait of Hormuz: Why a Ceasefire Agreement No Longer Works

While the financial world prices in capital scarcity, the physical world is sending synchronous signals.

Since the US-Iran conflict began in late February, Brent crude has followed a volatile path: $126 (March hostilities) → $72 (June ceasefire) → $85 (July breakdown) → $87.72 (August, as Iran proposed six conditions and Trump responded with a "semi-negotiation status"). Each fluctuation repeated the same pattern: the market first priced in "ceasefire imminent," then repriced for "conflict resumed." After several cycles, no one dares to easily bet that "this time it's real."

The question is no longer "will they fight," but "how long will the ceasefire last." Secretary of Iran's Supreme National Security Council Zolqadr stated that the Strait would remain closed if the US did not change its behavior. Trump responded by preparing to increase economic pressure. Both sides are talking, but neither is backing down.

The OVX (Crude Oil Volatility Index) is currently around 60—3.2 times the VIX. The message from the options market is clear: the biggest tail risk is not in US equities, but in the waterway.

Complicating matters further, the US buffer is thinning. The Strategic Petroleum Reserve (SPR) has fallen to 298.7 million barrels, dropping below 300 million for the first time since 1983. Before the war, it stood at 415 million barrels; after releasing 172 million barrels in March, it has been in net depletion. The International Energy Agency (IEA) characterized this as the "largest supply disruption in the history of the global oil market." If the Strait faces issues again, the US government's ability to release reserves to stabilize oil prices will be the weakest it has been in forty years.

Convergence of Three Undercurrents: From "Excess Savings" to "Capital Scarcity"

These three events may not be coincidental.

The AI leverage unwind occurred because 4x leverage is unsustainable in a rising interest rate environment. Long-term US Treasury yields surged because governments and corporations are simultaneously competing for funds from global investors. The issue in the Strait of Hormuz, superficially geopolitical, is fundamentally about the sudden scarcity of physical capital like oil. These three forces operate in different domains—equities, bonds, and commodities—but share the same root cause: a potential structural reversal in the global supply and demand dynamics of capital.

Goldman Sachs terms this shift "from excess savings to capital scarcity." The post-2008 world was defined by abundant savings, few projects, and low interest rates. Central bank quantitative easing (QE) provided a backstop, and governments could borrow at near-zero interest costs. This framework persisted for nearly twenty years.

In 2026, it was breached from both ends. On the supply side, global central banks have shifted from being net buyers of US Treasuries to net sellers. On the demand side, AI infrastructure, re-industrialization, defense spending, and energy transition are releasing trillion-dollar capital demands simultaneously. Goldman Sachs specifically noted that among these four forces, AI capital expenditure exerts "the most significant upward pressure on interest rates"—simultaneously pushing up risk-free rates and credit spreads.

Even if the Strait of Hormuz reopens tomorrow and all AI leveraged positions are cleared, the structural pressure on interest rates will not disappear. The root cause lies not in specific events, but in the paradigm shift.

A Different Perspective: A "Triple Liquidity Crunch"

Renaming these three forces reveals them as three distinct liquidity pressures. Though different in nature, their timing has coincided.

Trading liquidity faced issues first. The 4x leverage of AI funds led to concentrated short-term liquidation, causing the Philadelphia Semiconductor Index to drop 28.6% in a single month. The cycle of "drop → liquidation → further drop → more liquidation" forced funds with exposure across the board to stop losses.

Bond liquidity represents a deeper challenge. With $15 trillion in debt maturing within a year and an additional net issuance of approximately $2 trillion required for FY2026, the Treasury Department is siphoning hundreds of billions of dollars from the market monthly, even as buyers retreat. Yields must rise, increasing interest burdens, expanding deficits, and necessitating more new debt—a self-reinforcing loop.

Physical liquidity is the third blow. With 27% of global seaborne crude oil channels cut off, no alternative routes exist, and the SPR buffer has been depleted to a 40-year low.

The high temporal overlap of these three liquidity pressures constitutes a rare resonance of a "triple liquidity crunch." The extreme market movements in July—such as the Nasdaq rebounding 2.8% in a single day after six consecutive declines, 30-year yields hitting a 19-year high, and Brent crude recovering half its two-week 14% drop in just three days—are the price expression of this resonance.

This framework is not a predictive tool. It explains why July was so volatile but cannot predict August. The three pressures have different mitigation conditions: AI positions depend on when Citadel distributes them to the market, US Treasuries depend on the Treasury Department's issuance pace, and the Strait of Hormuz depends on the rhythm of geopolitical maneuvering. They are not synchronized. However, their resonance is sufficient to explain one thing: why the volatility this summer felt more intense than any single indicator suggested.

After This Summer: High Volatility as a Rehearsal for the New Normal

On the US equity front, Q2 earnings have sufficiently validated AI demand—cloud providers' growth rates hit collective new highs, and backlogs reached record levels. However, July's unwind proved the other side of the coin: in crowded and highly leveraged sectors, there is a vast distance between "being right" and "surviving to realize gains." JPMorgan's warning is particularly worth remembering—as institutional absorption capacity declines, reliance on retail support increases, meaning the next correction could see even fewer buyers than in July.

On the US Treasury front, Goldman Sachs' statement bears repeating: the Federal Reserve is a "passenger," not a "driver." If the fiscal trajectory remains unchanged, the structural pressure on long-term yields will not dissipate due to a few rate cuts. Whether the 10-year yield can return below 4% depends not on the next FOMC meeting, but on whether global savings are willing to flow back into US Treasuries—a factor beyond the Federal Reserve's control.

On the crude oil front, the risk premium for the Strait of Hormuz has shifted from a "one-off shock" to a "persistent discount." Even if a temporary ceasefire is reached, the large spread between OVX and VIX will not disappear in the short term. With the SPR at a 40-year low, the market will be more vulnerable and the government less capable when the next supply-side surprise occurs. Goldman Sachs' baseline judgment is that "neither side seems willing to escalate significantly, so energy prices should remain bounded," but this judgment itself is fragile—as the market moves too far in the opposite direction, "concerns can easily resurface."

The true legacy of the summer of 2026 is not the price volatility of any single asset. Rather, it is that the market has finally begun to pay a premium for the new paradigm of "capital scarcity." These three forces are merely three facets of a grand narrative; they collided this summer, but the underlying structural forces have yet to fully play out.