By Vivien Lou Chen
Continued worries about the U.S. fiscal outlook triggered another selloff in long-dated U.S. government debt on Wednesday, pushing the yield on the 30-year bond back above 5% for the second time this week in what may turn out to be a problematic development for stocks.When the yield on the so-called long bond rises above 5%, it tends to usually be negative for equities because of the impact that it has on borrowing rates for households and businesses. Wednesday’s selloff in U.S. government debt was pushing yields higher on everything from the 3-month Treasury bill through the 30-year bond, according to FactSet. Meanwhile, all three major stock indexes DJIA SPX COMP were mostly lower, with the Dow down by more than 300 points – or 0.7%.There have been a few exceptions, however. On Monday – the last time the 30-year yield BX:TMUBMUSD30Y briefly pierced 5% on an intraday basis – all three major U.S. stock indexes managed to brush this development aside. The S&P 500 eked out a small gain to finish higher for the sixth straight session.
Questions remain about whether this time will be different, considering Wednesday’s U.S. trading session is still ongoing. Stocks opened lower on Wednesday as Treasury yields jumped and the U.S. government debt market headed for a third straight session of selloffs.Weighing on investor sentiment now in the bond market are concerns about a $16 billion auction of 20-year Treasury bonds in the afternoon that may produce a lack of buying interest, Moody’s downgrade of U.S. government debt to Aa1 from Aaa last Friday, and a proposed bill in Washington which would extend tax cuts that President Donald Trump signed into law in 2017. Read: The U.S. just lost its last pristine credit rating. What that means for markets. and Trump’s tax bill is about to get even pricier. What that means for markets and your wallet.”For the most part, there’s a lot of uncertainty about this 20-year auction, mainly because of the downgrade that took place by Moody’s on Friday -which could cause many foreign investors and U.S. investors to stay away,” said Tom di Galoma, a managing director at Mischler Financial Group, which has its East Coast headquarters in Stamford, Conn. “Also the worry is over whether this tax bill gets done,” he said via phone. “There’s a lot of excess debt that needs to be financed and it’s a concern for a lot of investors.”Fiscal concerns are not limited to just the U.S. Bonds issued by other major developed nations have been under pressure since April, with a team at BofA citing Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom and Switzerland.
Past episodes in which the 30-year yield has headed toward 5%, or breached that level, have brought negative responses in U.S. stocks for at least a short period of time. In early April, for instance, the S&P 500 fell to a year-to-date closing low of 4,982.77 just as the 30-year yield was on a path toward 5%. The yield finally breached 5% on an intraday basis for the first time that month on April 9, but the index managed to shake off this development by the end of the day with its largest one-day percentage gain since October 2008 after Trump paused tariffs for 90 days on most countries. On Jan. 13, when the 30-year also breached 5%, the S&P 500 touched an intraday low for the month, yet still managed to eke out a slight gain by the close. A third example is October 2023: After the 30-year yield pierced 5% multiple times that month, the Dow and S&P 500 both finished lower, producing a third straight monthly loss that was the longest such streak since the three-month period that ended in March 2020.In a note on Wednesday, BMO Capital Markets strategists Ian Lyngen and Vail Hartman wrote: “We’re left with the age-old question – is this time different? Specifically, has the shift in sentiment associated with Trump’s trade war swung far enough in favor of optimism that the market has fully moved on from recessionary fears and is focused on supply and inflation? It certainly appears to be the case at the moment; although we’re skeptical that this will remain the case indefinitely.”The strategists added: “Even if we’re unwilling to fade the selloff at this stage, we ultimately suspect the limiting factor – if one becomes evident this week – will come in the form of a selloff in stocks.”
-Vivien Lou Chen
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05-21-25 1157ET
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