The guiding hand of the bond market is moving once again, with yields at multi-year highs around the world. Investors know the White House will be watching these shifts closely—Treasury Secretary Scott Bessent has said the bond market is ultimately the most important.
In the past, hiccups in the bond market have led to policy developments from the Oval Office, such as concerns about tariffs. But tensions in the Middle East aren’t so easily remedied, points out UBS’s Paul Donovan in a note to clients this morning.
Bond investors increasingly appear to believe sticky inflation isn’t going away anytime soon—and are preparing for the possibility that rates stay higher for longer. It’s not what President Trump wants to hear, but the data is getting harder to argue with.
ONE BIG THING
The AI industry’s biggest names are investing billions in ‘world models,’ writes Fortune’s Sharon Goldman.
Unlike existing models, these AI systems are designed not just to recognize patterns in text or images, but also to simulate how the physical world behaves. By training on millions of hours of video, these models can build an accurate internal picture of how the world works, physics and all—a crucial capability for a wide range of technologies, whether it’s to help a self-driving car predict what happens if a child runs into the street; help a home robot learn how to fold clothes; or simulate surgical procedures before a single incision is made.
Key players are betting big: Google recently unveiled a research preview called Project Genie, which can generate interactive, photorealistic environments from simple prompts—then predict how those worlds evolve and respond to a user’s actions, while “AI godmother” Fei-Fei Li and “AI godfather” Yann LeCun have each raised roughly $1 billion for separate startups developing world models.
“There’s a huge amount of excitement and investment in physical AI right now,” Ming-Yu Liu, a vice president at Nvidia’s Cosmos Lab, tells Fortune, adding that a “ChatGPT moment” is near. “I do believe that people are gradually figuring out the right recipe.”
IRAN
Tensions fraying once again
The truce between Iran and the U.S. seems more fragile than ever, with Iran’s foreign minister, Abbas Araghchi, warning late last night that “with lessons learned and knowledge we gained, return to war will feature many more surprises.”
It came after President Trump struck a firmer tone on reaching a deal to get the Strait of Hormuz reopened, normalizing global oil supply as a result. Trump suggested yesterday that the Iranian regime has a matter of days to come to the negotiating table and agree on terms for good.
“They’re begging to make a deal,” Trump told reporters yesterday. “I hope we don’t have to do the war but we may have to give them another big hit. I’m not sure yet, you’ll know very soon.”
ASIA
K-shape isn’t just in the U.S.
Michael Smith, CEO of storied developer Hongkong Land, sat down with Fortune editor Nick Gordon, as the company rides high on a share price that’s up more than 55% over the past 12 months, having passed its previous all-time high in January.
Hongkong Land is the largest commercial landlord in Hong Kong’s Central district, spanning 4.8 million square feet of prime office space and retail property in the heart of the city’s commercial area, Exchange Square.
But the K-shaped economy (when high earners drive growth while the fortunes of lower earners fall behind) isn’t constrained to the U.S.—Smith is reacting with a bet on downtown resurgence as a result. His reasoning is that prime real estate outside of contained financial hubs will grow more valuable as companies compete for talent and capital flows toward quality.
« What we like are ecosystems in the middle of a city where infrastructure and transportation connect,” he says. “I wouldn’t advocate going to any market and buying just one office building. Makes no sense to me.”
MORE FROM FORTUNE
CHART OF THE DAY
Why aren’t markets in worse shape?
Deutsche Bank’s Henry Allen is asking the same question as many investors: How is the stock market staying so stable in the face of oil supply shocks?
In a research note seen by Fortune, the Deutsche team breaks down why markets are seeing the Iran issue as a temporary shock as opposed to a lasting threat to the economic outlook.
Comparisons to past oil shocks are useful, he highlighted, because they often coincide with rapid data downturns. In 1973, the shock was followed by an immediate rise in the unemployment rate and, in 1990, U.S. payrolls saw their biggest contraction in seven years.
“This time, the story has been very different. In the U.S., payrolls grew more than 100k in both March and April, marking the first back-to-back readings above 100k since 2024. Moreover, the Atlanta Fed’s GDPNow estimate for Q2 is currently pointing to an annualized pace of +4,” Allen writes.
NUMBER OF THE DAY
44%
More than one in four employees say they hide in the bathroom at work for a bit of peace and quiet.
Career tool Kickresume surveyed nearly 2,000 workers worldwide and found the majority of those who escape to the restroom are only doing so for a couple of minutes, but 10% said they spent more than 10 minutes at a time taking a break in the stalls.
Many respondents also suggested they were too busy to orchestrate breaks—53% saying they don’t just pretend to be busy, they actually are.
THE FRONT PAGES TODAY
ONE MORE THING
Pet ownership is the cat’s meow
It can be surprising to uncover the lifestyle choices considered a luxury in times of economic strain. In 2026, it seems owning and caring for a four-legged friend is one expense some families are cutting out.
Taylor Bowley at the Bank of America Institute has been crunching the numbers when it comes to “pet parenting,” and found that prices for vet services rose nearly 6% YoY in April. Pet adoptions, particularly for dogs, have slowed since the pandemic. Lower-income homes, in particular, are less likely to have a pet in 2026 than they were even a year ago.
As well as opting out of ownership, consumers are also shopping differently for their furred or feathered friends. In April, spending growth by younger generations on pet products declined, especially among lower-income households. The variation reflects “selective spending” with households adjusting their outlays on discretionary categories (like toys, accessories, and supplies), as well as buying pet food from local grocery stores more frequently than specialty pet stores.
The bond market is currently experiencing significant shifts, with global yields reaching multi-year highs. Investors are acutely aware that the White House is closely monitoring these developments, as Treasury Secretary Scott Bessent has emphasized the bond market’s critical importance. Historically, fluctuations in the bond market have prompted policy changes from the Oval Office, particularly during periods of economic tension, such as concerns over tariffs. However, current geopolitical issues, particularly tensions in the Middle East, pose a more complex challenge, according to UBS economist Paul Donovan.
One major concern among bond investors is the persistence of sticky inflation, which is leading them to prepare for the likelihood that interest rates may remain elevated for an extended period. This sentiment is not favorable for President Trump, but the data supporting this view is becoming increasingly compelling.
In the tech sector, significant investments are being funneled into the development of ‘world models’ in artificial intelligence (AI). These models aim to go beyond merely recognizing patterns within data; they are designed to simulate physical world behaviors. By leveraging vast amounts of video data, these AI systems can create accurate representations of real-world dynamics, which can facilitate advancements in various applications—from self-driving cars to home robotics and even surgical simulations. High-profile companies like Google are leading these efforts, with initiatives such as Project Genie that can generate interactive, photorealistic environments based on simple user inputs. AI pioneers like Fei-Fei Li and Yann LeCun have raised substantial financing for their startups focused on these world models, indicating a growing excitement and investment trend in the realm of physical AI.
Meanwhile, diplomatic relations between Iran and the U.S. appear to be deteriorating. Iranian Foreign Minister Abbas Araghchi has issued warnings that any return to conflict would bring unforeseen consequences, following President Trump’s more aggressive stance on negotiations regarding the Strait of Hormuz and global oil supply normalization. Trump has suggested that the Iranian government is eager to reach a deal but has not ruled out military options if negotiations fail.
In Asia, economic trends similar to the K-shaped recovery seen in the U.S. are emerging. Michael Smith, CEO of Hongkong Land, discussed the company’s success, with its share prices surging over 55% in the past year. Hongkong Land is a key player in the commercial real estate market in Hong Kong, particularly in its Central district. Smith believes that prime real estate will gain value as businesses compete for talent and adapt to changing economic landscapes, highlighting the importance of urban ecosystems that prioritize infrastructure and connectivity.
A curious observation from Deutsche Bank’s Henry Allen raises questions about market stability amidst oil supply disruptions. Despite geopolitical tensions, the stock market has remained resilient, which Allen attributes to a prevailing belief that current issues are temporary rather than indicative of a long-term economic downturn. He contrasts the current situation with past oil shocks that led to immediate economic contractions and rising unemployment rates, noting positive payroll growth in recent months and strong GDP forecasts.
In a lighter note, a recent survey from Kickresume revealed that a significant number of employees—44%—resort to hiding in bathrooms at work for brief moments of peace. This behavior highlights the pressures of modern work life, with many respondents admitting they are genuinely busy, despite often appearing preoccupied.
Lastly, economic strains are affecting pet ownership trends. Data from Bank of America Institute shows that rising vet costs have led to a decline in pet adoptions, especially among dogs, with lower-income households less likely to own pets than they were a year ago. Shifts in consumer behavior are also evident, as younger generations are spending less on pet products, choosing to buy necessities from grocery stores rather than specialty pet retailers.
In summary, the bond market is signaling potential economic challenges ahead, while the AI sector is making significant strides in creating simulations of the physical world. Geopolitical tensions, particularly involving Iran, add uncertainty to global markets. Meanwhile, the K-shaped economic recovery is affecting real estate and employment trends, and even pet ownership is being impacted by the ongoing economic climate.
