July 13, 2024

Dow Dips 430 Points as Treasury Yields Soar to a Decade High

Image Credits: Richard Drew/AP

Wall Street took a stomach-churning dive on Tuesday afternoon in a heart-pounding twist of events. The Dow plummeted by a jaw-dropping 430 points, marking its lowest close since June, while the S&P 500 and Nasdaq Composite joined the downward spiral. What triggered this financial rollercoaster ride, you ask? US Treasury yields soaring to levels not seen in over a decade.

Investors watched in nervous anticipation as the benchmark 10-year Treasury note yielded a startling 4.802%, a number last witnessed in the distant memory of August 2007. The 30-year was just a little behind, resting at 4.936%, its highest point since September 2007. These surging yields had market watchers on edge, fearing that higher borrowing costs could slam the brakes on the housing market.

The Federal Reserve, ever the puppet master behind the scenes, had recently signaled the possibility of yet another interest rate hike this year, potentially keeping rates elevated into the next. With this ominous backdrop, concerns are growing that the housing market might be the next domino to topple, setting off a chain reaction leading to a recession.

While the Fed doesn’t directly control mortgage rates, its actions significantly influence them. Mortgage rates tend to shadow the yield on 10-year US Treasuries, which means when Treasury yields ascend, so do mortgage rates. This leaves homeowners and prospective buyers feeling the squeeze.

Throughout most of the year, Wall Street danced to the tune of AI excitement, propelling tech stocks to dizzying heights. But in August, the party came to an abrupt halt. Vital economic data had investors sweating, worried that an unwaveringly robust economy and a blazing hot job market would compel the Federal Reserve to keep interest rates aloft to quell inflation.

As Treasury yields shot up, the US dollar followed suit, causing further erosion of the stock market’s spring gains. Stocks generally take a hit when government bond yields rise because it signifies that investors can snag handsome returns on less risky assets, making the stock market less appealing.

Adding fuel to the fire, fresh data from the Bureau of Labor Statistics revealed an unexpected surge in US job openings, rocketing to an estimated 9.61 million in August. This surge intensified the yield climb compared to the previous month’s revised estimate of 8.92 million and an economist consensus of 8.8 million.

The CNN Fear & Greed Index painted a grim picture, with a reading of 16, indicating “Extreme Fear” – the lowest level since the ancient days of October. Meanwhile, West Texas Intermediate crude futures, the US oil benchmark, dipped below $90 as OPEC+ output cuts began to exert their cooling influence on oil prices.

As if that weren’t enough, the specter of a government shutdown loomed large. House Republicans contemplated the ousting of Speaker Kevin McCarthy for his cooperation with Democrats in averting a shutdown. The House’s political turmoil highlighted the precarious backdrop for addressing fiscal issues, raising concerns of a credit rating downgrade. Moody’s, the lone credit rating firm still bestowing a perfect rating upon the United States, warned that a government shutdown would be “credit negative” for the nation.

During this financial rollercoaster ride, market analysts like Ed Moya from OANDA cautioned that unless the upcoming jobs report surprises on the downside, Wall Street may price in at least one more Fed rate hike before the year’s end. The stakes are high, the tension palpable, and the twists and turns of the market’s trajectory uncertain. Hold onto your hats, folks; it will be a wild ride.

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