Wall Street suffered its biggest selloff in a month on Wednesday as Treasury yields spiked on worries that government debt would swell by trillions of dollars if Congress passes U.S. President Donald Trump’s proposed tax-cut bill.
The slide in U.S. stocks accelerated mid way through the trading session after a US$16-billion auction of 20-year bonds attracted only soft demand from investors, in what was seen as a test of foreign appetite for U.S. debt.
A deteriorating fiscal outlook has captured the market’s attention after Moody’s Investors Service on Friday cut the United States’ sovereign credit rating from the top designation of triple-A. Yields on longer-term U.S. bonds have been rising steadily since the start of May, driven by U.S. fiscal concerns and worries that Trump’s unpredictable economic policies will not only stoke inflationary pressures but also erode the appeal of U.S. assets.
On Wednesday, the yield on benchmark U.S. 10-year notes rose 11.5 basis points to 4.597% and hit its highest since mid-February. The U.S. 30-year bond rose above 5%, considered an important psychological and technical level, to its highest level since October 2023.
“(Long-term) yields of 5% with another auction not doing well is not a sign people are feeling good about the U.S. economy,” said George Cipolloni, portfolio manager at Penn Mutual Asset Management in Delaware.
Losses in Canada’s main index stock were less acute, but brought an end to a 10-day winning streak, its longest since October 2021. Canadian bond yields rose in the footsteps of U.S. Treasuries, with the five-year bond yield - influential on fixed mortgage rates - climbing above 3% for the first time since January.
U.S. stocks closed sharply lower on Wednesday as Treasury yields spiked on worries that U.S. government debt would swell by trillions of dollars if Congress passes President Donald Trump's proposed tax-cut bill.
Reuters
A Congressional committee set an unusual hearing as House Republicans sought to overcome internal divisions about proposed budget cuts, including to the Medicaid health program.
Nonpartisan analysts said the Republican bill could add between US$3 trillion and US$5 trillion to the U.S. government’s US$36.2 trillion debt.
Market watchers said the recent rally in U.S. and Canadian stock markets made equities vulnerable to some profit-taking, with the Republican tax bill negotiations taking centerstage in part due to a lack of top-tier U.S. economic data this week.
“The combination of gaping deficits throughout the forecast horizon, potential fiscal stimulus, and sticky inflation isn’t friendly for the bond market,” Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, said in a note. “If at least one of those three drivers doesn’t change, look for the uptrend in yields to continue.”
The Dow Jones Industrial Average fell 816.80 points, or 1.91%, to 41,860.44, the S&P 500 lost 95.85 points, or 1.61%, to 5,844.61 and the Nasdaq Composite lost 270.07 points, or 1.41%, to 18,872.64.
The S&P/TSX composite index ended down 214.46 points, or 0.8%, at 25,839.17, after posting a record closing high on Tuesday.
The interest-rate sensitive real estate sector in Toronto fell 2.1% and technology ended down 2.3%. Higher bond yields reduce the value to investors of the long-term cash flows that high-growth tech stocks are expected to produce. They also offer more competition to income-producing equities because of their higher payoffs, often pressuring dividend stocks lower.
Heavily weighted financials lost 1% ahead of the start on Thursday of earnings season for Canada’s big banks. The lenders are bracing for trade uncertainty and are expected to have shored up loan loss reserves in the second quarter.
The materials group, which includes metal mining shares, was the only one of 10 major TSX sectors to end higher, adding 1.3%.
Among individual stocks, Shares of Canada Goose Holdings Inc jumped 19.1% after the luxury retailer reported stronger-than-expected quarterly sales.
In the U.S., ten of the 11 S&P 500 sectors fell, led by real estate, healthcare, financials, utilities, consumer discretionary and technology equities. Communication services stocks gained.
Google parent Alphabet rose 2.7%, while Nvidia lost 1.9%, Apple fell 2.3% and Tesla shed 2.7%.
UnitedHealth Group dropped nearly 6% after a Guardian report said the healthcare conglomerate secretly paid nursing homes thousands of dollars in bonuses to help reduce hospital transfers for ailing residents. HSBC downgraded the stock to “reduce” from “hold”.
Target fell 5.2% after slashing its annual forecast due to a pullback in discretionary spending.
The S&P 500 has climbed more than 17% from its April lows, when Trump’s reciprocal tariffs roiled global markets.
The U.S. dollar also came under pressure Wednesday, falling about 0.36% against a basket of major currencies.
Cryptocurrencies fared well, however, as investors sought alternative investment sources to the dollar. Bitcoin rose to its highest level on record, eclipsing the previous high from January, as risk sentiment continues to improve after last month’s tariff-induced selloff.
The world’s largest cryptocurrency touched a high of US$109,760.08.
“Now that January’s high has been surpassed - and the 50 percent upside from April’s lows has been achieved - bitcoin enters blue sky territory with tailwinds in the form of institutional momentum and a favorable U.S. regulatory environment,” Antoni Trenchev, co-founder of digital asset trading platform Nexo, said in an emailed comment.
With reports from Reuters