Stocks fall, with the Nasdaq and S&P 500 retreating from record territory, as bond yields suddenly jump

U.S. Treasury yields shot higher Wednesday on renewed anxiety about inflation and the potential for more aggressive Federal Reserve rate hikes.

All eyes were on the jolt higher of U.S. Treasury yields on Wednesday morning after economic data on the manufacturing front surprised to the upside, sending a shock through the world's most important bond market.

The all-important benchmark 10-year Treasury yield BX:TMUBMUSD10Y surged 13 basis points to 5.08%, its highest level since July 2007, according to Dow Jones Market Data.

The level of the "affordability rate" matters for new mortgages, car loans and other forms of household debt, but it's also the magnitude of the 10-year yield's rapid climb that matters on Wall Street.

"It's not that rates are moving up, it's that they're jumping up," said Keith Lerner, chief investment officer at Truist Advisory Services. "The intensity of the move is hurting stocks."

The Dow Jones Industrial Average DJIA was off 0.6% as of noon Eastern on Wednesday, while the tech-heavy S&P 500 index SPX and Nasdaq Composite COMP were down 0.6% and 1%, respectively.

The Nasdaq was coming off a fresh record close on Tuesday, while the S&P 500 hasn't been far behind its record.

The jump in long-dated yields has been something Treasury Secretary Scott Bessent has been trying to avoid, including by implementing a series of increased U.S. debt buybacks through early November.

While traders say those had little impact on long-dated rates, the bigger driver for the recent calm in bonds was the Federal Reserve's decision last week to pivot to rate hikes to fight inflation.

Dustin Reid, chief fixed-income strategist at Mackenzie Investments, said the calm in bonds now appears to be breaking down as the traders brace for potentially more rate hikes from the Fed.

The odds of another Fed rate hike in October jumped to about 71% on Wednesday, up from 55% a day ago, according to the CME FedWatch Tool. The chances of one or more hikes by the central bank's December meeting were near 95%.

A jump in oil prices (BRN00) (CL.1) Wednesday and sharp swings in 10-year yields in Europe also have been a factor, said Tom di Galoma, a managing director at Mischler Financial Group, who noted sharp selling pressure out of Europe.

Yields in the U.S. moved sharply higher Wednesday after the release of S&P Global U.S. manufacturing data for September showed its fastest expansion since July 2021, and fourth straight month of gains.

When the Treasury market gets swept up in selling, yields increase, which pushes up borrowing costs for households, businesses and governments.

The inflation-sensitive 30-year Treasury yield BX:TMUBMUSD30Y climbed 9 basis points to 5.39%.

Tellingly, the 2-year Treasury yield BX:TMUBMUSD02Y jumped 14 basis points to 4.88%, its highest level in more than two years. When the policy-sensitive rate suddenly re-prices by that much, it's a signal from Wall Street that more Fed rate hikes are expected.

-Joy Wiltermuth