U.S. stock futures fell Tuesday as the 10-year Treasury yield climbed above 5% for the first time since 2007, with investors watching a surge in oil prices and bracing for a Federal Reserve interest-rate decision expected Wednesday.
S&P 500 futures and Nasdaq-100 futures each retreated 0.3%, with Dow Jones Industrial Average contracts shedding 229 points, equivalent to a 0.4% decline. The 10-year Treasury note touched an intraday peak of 5.041%, a level not seen since 2007. As is typical, the rise in yields corresponded with a decline in bond prices.
Oil prices added to the pressure after Saudi Arabia shut down a key pipeline that bypasses the Strait of Hormuz. Brent crude advanced 1.8% to $107.55 a barrel, and West Texas Intermediate gained close to 2%, trading at $103.36. Saudi Arabia’s move has stoked fears that tighter oil supplies could further fuel inflation.
Pricing in fed funds futures implies about a 92% chance the central bank delivers a quarter-point hike at Wednesday’s gathering, which would push the upper bound of its target range to 4.0%, according to The Wall Street Journal. That probability has risen from 59% a week ago.
Christopher Hodge, chief economist of the U.S. at Natixis CIB Americas, said the Fed is expected to signal that Wednesday’s move does not lock the central bank into any particular path. “We also think that he will emphasize that this decision was discrete and does not pre-commit the Fed to any actions in subsequent meetings, giving him and the Committee maximum flexibility to respond to shocks,” Hodge said, referring to Fed Chair Kevin Warsh.
AI-linked equities were among the session’s biggest decliners, dragged lower after Anthropic CEO Dario Amodei urged a more cautious pace of AI development and OpenAI CEO Sam Altman said the company would not pursue an IPO this year. Nvidia shed 3%, Corning plunged 13%, and the iShares AI Innovation and Tech Active ETF retreated close to 4%.
Strategists at Barclays said in a note Tuesday that the approach of the 5% threshold on 10-year yields marks a level at which rates have historically become a more persistent drag on equities. The Barclays team wrote that “while earnings have so far offset the drag, the approaching 5% threshold in 10Y yields marks a historically important inflection point, beyond which rates have typically become a more persistent headwind for equities,” according to CNBC.
Markets in Asia closed lower as well. South Korea’s Kospi slipped 0.85%, Hong Kong’s Hang Seng gave up 1%, and China’s CSI 300 edged down 0.67%, while Japan’s Nikkei 225 ended the day roughly flat.
