The S&P 500 dropped 0.79% to close at 7,515.34 on July 13, while the Nasdaq Composite took a harder hit, falling 1.55% to 25,873.18. The culprit: Treasury yields climbing fast enough to make growth stocks look expensive and safe havens look attractive.
The 10-year Treasury yield rose more than 4 basis points to 4.614%, and the 2-year yield jumped over 6 basis points to 4.271%. When you can earn nearly 4.6% on a government bond with essentially zero risk, the bar for owning volatile assets gets a lot higher.
What’s driving yields higher
Oil prices surged past $75 per barrel, driven by escalating geopolitical tensions between the US and Iran. The Strait of Hormuz, a narrow waterway through which roughly a fifth of the world’s oil supply passes, has become a flashpoint again. Higher oil means higher energy costs, which feeds directly into inflation readings.
That inflation pressure is making it increasingly difficult for the Federal Reserve to justify rate cuts anytime soon. The 2-year yield climbing faster than the 10-year is particularly telling. The 2-year note is the market’s best real-time gauge of where traders think the Fed is heading. A 6-basis-point jump in a single session suggests that expectations for monetary policy relief are being actively repriced.
