The Dow Jones Industrial Average fell for a third straight session on Thursday, as Treasury yields at multidecade highs continued to weigh on the most cyclical parts of the market.
The 30-stock index slid 137 points, or 0.3%. The S&P 500 was flat, as was the Nasdaq Composite.
Stocks came off their session lows after Reuters, citing sources, reported that U.S. and Iranian negotiators in New York are considering a deal that would bring a phased end to the conflict in the Middle East, whereby Iran would reopen the Strait of Hormuz and the U.S. would lift its economic blockade on Tehran.
But oil prices and bond yields remained elevated. Brent crude, the international benchmark, rose more than 3% to close above $106 per barrel. U.S. West Texas Intermediate futures climbed nearly as much to settle at about $95 per barrel.
The 30-year Treasury bond yield touched 5.446%, a level not seen since June 2004. The benchmark 10-year Treasury note yield, which is tied to rates on mortgages, surged to 5.15%, near levels not reached since July 2007. The 2-year note yield was flat on the day, but scaled to a 2023 high earlier in the week.
As yields surged, so did the market’s anticipation of further rate hikes from central bank policymakers. Fed funds futures trading suggests a nearly 71% likelihood that the Federal Reserve lifts its key rate once more in October, per the CME FedWatch tool. That compares to a roughly 55% probability just a week ago.
Higher bond yields tend to squeeze consumers’ finances as they face higher borrowing costs at a time when they’re already paying more in fuel costs.
Yet, Wednesday’s readings from S&P Global’s manufacturing and services purchasing managers’ indexes suggested that U.S. businesses are continuing to boom.
“The economy continues to show remarkable resilience, but that strength is keeping inflation concerns alive and pushing interest rates higher,” said Jason Stephens, founder of Evertern Wealth. “The bond market may be the most important market to watch right now.”
The bigger issue, according to Stephens, is not whether the Fed raises interest rates again but rather “how long rates remain elevated and what a 10 year Treasury above 5% eventually does to housing, corporate borrowing, private markets, and equity valuations.”
The founder also said that energy is “one of the biggest swing factors,” as any quick move in oil in response to developments surrounding the conflict in the Middle East “feeds directly into the inflation and interest rate conversation.”
Ultimately, markets is experiencing an “interesting contradiction” at present, he said. “Investors are worried about rates because the economic data are strong, not because the economy is falling apart.”