US stock indices fell sharply on Wednesday. The Dow lost 1.9%; the S&P 500 slid 1.6% while the NASDAQ closed off 1.4%. But it was the mid-cap, domestically-focused Russell 2000 which took the brunt of the selling, ending down 2.8% on the day.
Investors were rattled by the continued sell-off across bond markets. The yield (which moves inversely to bond prices) on the 10-year Treasury Note briefly topped 4.60%, its highest level since February, while the 30-year yield shot above 5.0%, going on to hit highs last seen in October 2023.
The increase in longer-term borrowing costs reflects renewed investor concerns over the ever-expanding size of the US budget deficit, and overall national debt. This was brought into sharp relief after ratings agency Moody’s joined S&P and Fitch in downgrading the US.
This comes as President Trump is attempting to drive his tax bill through Congress which, according to estimates, could add anything from $3-$5 trillion to existing debt levels. Matters weren’t helped by a disappointing Treasury auction of 20-year bonds yesterday evening.
Bond yields can move for a variety of reasons. For instance yields can rise on optimism over the economic outlook as investors then expect the central bank to raise rates to calm ‘animal spirits’. This is not one of those occasions.
Instead, rates are going up as investors anticipate more supply to help fund the growing deficit. And this time the Federal Reserve is reducing its bond holdings, not adding to them. The fact that Japanese bond holders are simultaneously, and finally, having conniptions over Japan’s egregious debt levels only adds to the uncertainty.
All this comes against the tariff backdrop and the Trump administration’s trade war with (most) of its trading partners. Chief amongst these is, of course, China.
While things have calmed down considerably since last month as the most excessive tariffs were put on hold until the summer, the trade war hasn’t ended. Investors appear to be hoping that it will all come right on the day. Maybe. But there’s the potential for a lot of negative headlines before the two major tariff deadlines are reached.
US stock index futures were mixed in early trade, albeit with a slight downward bias. The yield on the 10-year Treasury was a smidge lower. But if equities do take another turn lower, traders should keep a very close eye on how the S&P behaves if it falls back towards 5,800.
Source: TN Trader
