The world’s most influential bond yield surged decisively above 5 per cent on Wednesday as more signs emerged of growing inflationary pressures in the U.S., sending stocks and fixed income portfolios tumbling.
The benchmark U.S. 10-year yield briefly rose to near 5.14 per cent, back to where it was in 2007 before the global financial crisis caused yields to crater. In late afternoon trading, it was fetching 5.10 per cent, up 16 basis points for the session.
That was still a large daily move for the bond market, and had Canadian bond yields surging as well. The Canada five-year yield, closely followed for its impact on fixed mortgage rates and GICs, hit its highest since 2024.
Bond yields were higher across the curve – from short-term tenures to long term – an indication that traders were bracing not only for rate hikes but also for inflationary pressures to linger. That also meant investors widely suffered declines in bond portfolios – prices move inversely to yields.
All three major U.S. equity indexes weakened, with losses for Canada’s S&P/TSX Compositive Index – heavily weighted towards materials and interest-sensitive stocks that tend to weaken when yields rise – outpacing Wall Street. It closed down 584.18 points, or 1.6 per cent, marking its biggest one-day decline since June 5.
A survey showed U.S. business activity unexpectedly raced to a more than five-year high in September amid intensifying price pressures, raising expectations the U.S. Federal Reserve will increase interest rates at its October meeting.
“They’re painting a picture of the economy not just being resilient, but overheating, and in that sense, robust economic growth is no longer balanced, it’s adding to inflationary pressures,” said Will Compernolle, macro strategist at FHN Financial.
Meanwhile, crude oil prices gained as Iran’s president said Tehran would never surrender to U.S. pressure. U.S. crude rose 2.3 per cent to US$92.60 a barrel and Brent rose to US$103.50 per barrel, up 4.28 per cent on the day.
“The same factors that pushed the FOMC to raise rates for the first time in three years last week, notably elevated inflation and a solid economy, are lining up for a repeat move in the months ahead,” Sal Guatieri, senior economist with BMO Capital Markets, said in a note.
Adding to the hawkish tone, Fed Governor Michael Barr said that the central bank took an important step last week to “recalibrate” short-term borrowing costs to bring down inflation, and signaled that further rate hikes will likely be needed.
Fed funds futures traders are now pricing in a 66 per cent chance of an October rate hike, up from 53 per cent a day earlier.
A break through key technical levels amplified the rise in rates, analysts said.
“It looks like for now the technical boundaries that had kept a lid on yields for the last few weeks are just broken, and once this momentum starts it can make traders very hesitant to step in front of it,” Compernolle said.
The U.S. Treasury Department also drew very weak demand for a US$70-billion 5-year note auction amid the bond market selloff, with the notes selling at the highest yield at an auction since 2007.
Higher rates can weigh on equities both by raising the cost of financing corporate investment and by luring buyers back into the bond market.
The Dow Jones Industrial Average fell 0.68 per cent and the S&P 500 dropped 0.75 per cent. The Nasdaq Composite was down 1.13 per cent, a sharp reversal after hitting a record high on Tuesday.
On the TSX, heavily weighted financials fell 1.9 per cent. The materials sector, which includes metal mining shares, ended 3.7 per cent lower. Gold lost 1.6 per cent as the U.S. dollar benefited from rising rate hike expectations. Gains for energy helped limit the TSX’s decline, with the sector adding 0.5 per cent.
The U.S. dollar rose to multi-week highs versus the euro, sterling and the Canadian dollar. The loonie was trading 0.3 per cent lower at 1.41 per US dollar, or 70.92 US cents, after touching its weakest intraday level since July 29.
On Wall Street, Meta Platforms rose 1 per cent, bringing its gain this week to 12 per cent following a strong reception of its “Muse” AI assistant, which analysts say could benefit tech infrastructure stocks, while challenging banks, online shopping platforms and other consumer businesses. Google parent Alphabet fell 3.8 per cent. Amazon, which has blocked Muse from its shopping platform, dropped 2.2 per cent.
The PHLX chip index dropped 1.2 per cent, with Nvidia down 1.5 per cent. Expedia and Airbnb both fell more than 7 per cent.
The Nasdaq recorded record-high closes in the previous two sessions as Wall Street remained optimistic about AI-related companies. The S&P 500 is less than 2 per cent below its record high close on August 13.
Nine of the 11 S&P 500 sector indexes declined, led lower by utilities, down 1.72 per cent, followed by a 1.49 per cent loss in communication services.
The S&P 500 is trading just under 19 times expected earnings, its lowest valuation since 2023, according to LSEG data. AI-related heavyweights are responsible for much of the recent increase in earnings expectations.
Volume on U.S. exchanges was relatively heavy, with 17.0 billion shares traded, compared to an average of 16.5 billion shares over the previous 20 sessions.
Casual dining chain Cracker Barrel rallied 4.5 per cent after beating fourth-quarter sales estimates.
Paychex dropped 8.8 per cent after the HR and payroll services provider said that its largest segment missed first-quarter revenue estimates.
Declining stocks outnumbered rising ones within the S&P 500 by a 1.9-to-one ratio.
The S&P 500 posted 14 new highs and 33 new lows; the Nasdaq recorded 41 new highs and 186 new lows.
With files from Reuters