At 1 p.m. on Thursday in New York, the $20 billion 30-year Treasury auction began at the highest rate since 2007. The S&P 500 Index fell as much as 1.2% in a matter of minutes before stabilising. Wall Street’s fear gauge, the Cboe Volatility Index, usually referred to as the VIX or the VIX, surged past 17. Additionally, the small-cap Russell 2000 Index saw an acceleration of its selloff, which resulted in its lowest closing in months.
Before the market started on Thursday, stocks had already survived a hotter-than-expected inflation figure, with the S&P 500 reaching session highs at lunchtime. The index has surged for four days in a row thanks to bulls, whose confidence was stoked by multiple Federal Reserve officials expressing that rate increases might not be necessary.
However, following the 30-year Treasury auction, which attracted little interest and negatively affected the mood of the market overall, sentiment turned around. Up from roughly 30% as recently as Wednesday, swap contracts related to future interest-rate decisions have increased the likelihood of another quarter-point hike back to roughly 50%.
BMO Wealth Management’s chief investment officer, Yung-Yu Ma, said over the phone, “It’s really starting to sink in that the Fed will keep rates higher for longer.” Investors are accepting the notion that short-term rates have peaked, but they are shocked and incredulous that longer-term rates are still rising. The longer-term rates could continue to rise, which would worry investors in stocks.
At 4.837%, the yield in pre-auction trade at the time of the bidding deadline was over four basis points higher than the yield in the Treasury auction. Even though this was the highest-yielding long-bond auction since 2007, demand was below dealers’ expectations.
The bad three-year sale on Tuesday and the dismal ten-year auction on Wednesday preceded it as well.
Chief investment officer of Bleakley Financial Group LLC Peter Boockvar stated, “Treasury auctions really only have an impact on the day of it in terms of market reaction, but it’s still a messaging signal on demand.” And this week’s demand was not that strong. In reaction, Treasury yields are at their highest points of the day.
Equity investors had already dismissed a consumer price index report that exceeded forecasts before mood turned negative. Traders instead paid attention to the core annual inflation rate, which increased at the slowest rate in the past two years in September—4.1%.
The longest winning run since August would end if Thursday’s S&P 500 decline holds. This came after several Fed officials stated that the collapse in the bond market would eliminate the necessity for another rate hike. When Fed Governor Christopher Waller stated on Wednesday that the central bank may wait and see what occurs before acting further, he reaffirmed the message.
After falling for two days, the yield on 10-year Treasuries increased to above 4.7% on Thursday. With a 0.4% decline, the tech-heavy Nasdaq 100 Index had the least negative session. Both the gauge’s and the S&P 500’s futures were up 0.1% in early Asian trading on Friday.
According to Infrastructure Capital Management’s founder and CEO, Jay Hatfield, “the bond market is currently moving the market almost solely.” “That’s going to change tomorrow because earnings season is approaching.”