US equities closed lower on Tuesday as a surge in Treasury yields to levels not seen in nearly two decades and rising oil prices weighed on investor sentiment ahead of the Federal Reserve's interest-rate decision.
The Dow Jones Industrial Average fell 330.74 points, or 0.63%, to 52,090.46. The S&P 500 dropped 0.45% to 7,585.51, while the Nasdaq Composite declined 0.77% to 25,983.58. The broad-based selloff reflected growing concerns that higher borrowing costs and energy-driven inflation could pressure corporate valuations.
Treasury yields hit 5% for first time since 2007
The benchmark 10-year Treasury yield climbed to 5.041% during the session, its highest level since 2007, before easing to trade around 5.012%. The move higher in yields has been a persistent drag on equities, as government bond selloffs signal expectations of prolonged monetary tightening.
Higher rates are particularly challenging for companies with heavy debt loads, including those that have borrowed aggressively to fund artificial intelligence infrastructure. Barclays strategists noted that rising yields are increasingly posing risks to equity portfolios after already compressing valuations. The approach of the 5% threshold is seen as a critical level, as historically, rates above that mark have become a more sustained headwind for stocks.
Despite the overall market weakness, some AI-related names rebounded from recent declines. Coherent gained more than 1%, AMD rose 2%, and Qualcomm advanced 5%. However, the broader tech sector remained under pressure as investors weighed the impact of higher discount rates on future earnings.
Oil prices surge on supply disruptions
Oil futures extended their gains after Saudi Arabia shut down a key pipeline that bypasses the Strait of Hormuz following attacks on its energy infrastructure. Brent crude for November delivery rose 3% to above $109 a barrel, while West Texas Intermediate futures gained 5% to above $106. Front-month contracts settled 4.4% and 2.9% higher, respectively, with diesel futures reaching a record high.
The spike in energy prices has intensified concerns that higher fuel costs could feed into broader inflation, potentially prompting central banks to maintain a hawkish stance. This dynamic is also amplifying worries about the economic fallout from the ongoing Middle East conflict, as sustained inflationary pressures could keep interest rates elevated for longer.
Fed decision takes center stage
The Federal Reserve began its two-day policy meeting on Tuesday, with its rate decision due Wednesday. Markets are pricing in a high probability of a 25-basis-point increase, which would lift the target range to 3.75%-4.00%. According to CME's FedWatch tool, expectations for a hike have jumped sharply from 33.1% a month ago, reflecting hotter inflation data and a significant rise in US crude prices over the past two weeks.
If implemented, this would mark the first rate increase in more than three years. Investors are also assessing how policymakers might respond to continued energy-price pressures. The potential for further hikes could keep equity markets under pressure if oil prices remain elevated, as higher rates tend to dampen economic activity and corporate earnings growth.
In other markets, bitcoin weakness and the Senate's failure to advance comprehensive cryptocurrency legislation weighed on crypto-related stocks, with Coinbase and Strategy closing sharply lower. Meanwhile, bond ETFs like TLT have dropped to multi-month lows despite significant inflows, reflecting the yield surge. The 10-year yield crossing 5% has also raised concerns about valuation squeezes for high-multiple stocks, while gold prices remain near $4,300 as investors await the Fed's decision.
This article is for informational purposes only and does not constitute financial advice.
