Dow drops 110 points as bond yields, oil pressure stocks

The S&P 500 fell 0.69 percent and the Nasdaq Composite dropped 1.33 percent as the 30-year Treasury yield touched a 19-year high above 5.3 percent and Brent crude held above $91 a barrel, stoking concerns that inflation will stay above the Federal Reserve's 2 percent target. The Dow Jones Industrial Average shed about 110 points.

"We're kind of testing the outer limits of where the bond vigilantes are really going to start protesting," Ed Yardeni, president of Yardeni Associates, said in a CNBC interview. "They're concerned that maybe the Fed isn't being vigilant enough about inflation; they're concerned about the price of oil."

Semiconductor stocks led the decline, with the Nasdaq Composite closing 1.33 percent lower. The 30-year yield has climbed more than 40 basis points since a late-June low, pressured by a widening budget deficit, sticky inflation, and a record pace of corporate debt issuance. The U.S. posted a $432.3 billion budget shortfall in July, the widest single-month gap since March 2021, with total government debt near $40 trillion and debt financing costs reaching $1.12 trillion through July.

The rise in long-dated yields has been gradual rather than sudden, said Anshul Pradhan, head of U.S. rates research at Barclays Capital. "Three independent releases argued for lower yields this month; long end yields moved higher anyway," he said in a client note. The Federal Reserve has held its benchmark rate steady in a range between 3.50 percent and 3.75 percent all year, and markets now see little chance of a hike at the September meeting.

U.S. companies have issued nearly $1.7 trillion in bonds this year, up 27 percent from a year earlier, adding duration supply that competes with Treasurys for investor demand. "On top of concerns about the growth of government debt, a record pace of corporate bond issuance has added substantial duration supply to U.S. fixed income markets," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said in a note.

The selloff extended across Asia, where Japan's Nikkei 225 fell 2.54 percent to 67,505, South Korea's KOSPI dropped 1.57 percent to 6,869, and Taiwan's weighted index lost 1.21 percent to 45,308. Gold eased 0.47 percent to 155,205 rupees per 10 grams, while silver declined 1.20 percent.

Higher yields and firmer oil threaten to keep inflation above the Fed's 2 percent target, with core prices at 2.5 percent. That raises the risk of prolonged elevated borrowing costs for rate-sensitive sectors such as technology, where investors had priced in cheaper capital for AI-driven expansion. KB Securities has warned that capital providers are cutting back on AI investment, adding to pressure on semiconductor shares that have driven much of the market's gains this year. Yardeni, though generally constructive on both debt and equity markets, said the bond market is "finally working the way it should work" as it allocates capital efficiently, and expects higher yields to soon attract buyers.

This article is for informational purposes only and does not constitute investment advice.