Bond Yields Are Scaring Stocks Even if Tech Doesn't Show It

Surging bond yields are scaring stocks even if strong tech amid the AI boom is hiding it. Will the squeeze break consumers and topple the economy?

• The 30-year Treasury yield reached its highest since 2002 as long-term bonds fell for a fifth straight day
• The tech-heavy Nasdaq 100 held up while the small-cap Russell 2000 touched its lowest level since early June
• Dismal consumer confidence data helped trim Fed rate hike odds ahead of Friday’s US jobs report

The stock market’s reaction to surging long-term US borrowing costs seems confined to sectors outside of tech. The 30-year Treasury bond fell for a fifth consecutive session, pushing its yield to the highest since 2002. That rattled Wall Street intraday but the Nasdaq 100 clawed its way back into positive territory by the session close, and the bellwether S&P 500 kept losses modest. The Russell 2000 – with little tech exposure and greater sensitivity to interest rates and the business cycle – fared far worse.

The Invesco S&P 500 Equal Weight ETF (RSP), which dilutes the influence of the largest tech names, traced a path far closer to the Russell than to the headline index. The parts of the equities space that are buoyed by the AI building boom are still resisting the rise in yields. Much of the rest of the market is not.

Short rates refused to follow where surging long rates led

The front end of the yield curve, which is most sensitive to Federal Reserve policy expectations, moved in opposite direction. Shorter-term Treasury yields edged lower, and some of the assets recently punished amid swelling rate hike bets caught a break. Gold stopped falling after its steepest drop in almost four months a day earlier, and silver consolidated without extending its slide. The US dollar backed away from pushing the euro below its July lows.

Two developments seem to explain the shift. Crude oil fell after the Financial Times reported that mediators are pressing the US and Iran toward even a short-term deal to reopen the Strait of Hormuz, though nothing concrete has emerged. Cheaper energy eases the inflation worries that have fueled rate hike speculation throughout the US-Iran war.

Meanwhile, US economic data softened. Job openings fell by 256,000 in August to the lowest since March, according to the Job Openings and Labor Turnover Survey (JOLTS). The Conference Board’s consumer confidence index dropped to its weakest reading since 2014, with gauges of both current conditions and expectations falling and a growing share of respondents saying jobs are hard to find.

Traders trimmed their rate hike bets in response. Fed funds futures now put the probability of a hike in October at roughly 50%, down from about 70% at the start of the week. A 25-basis-point (bps) increase by December still looks like a sure bet. That broadly agrees with the Fed, which signaled that one more step higher will follow September’s rate rise before the year is out. However, the markets’ conviction in three more hikes to follow in 2027 has softened somewhat.

Can the AI boom hold up the economy if consumption falters?

Soft consumer confidence figures sit awkwardly beside otherwise chipper news-flow recently. Last week, S&P Global PMI surveys showed US business activity growing at the fastest pace since 2021, far stronger than expected. The Atlanta Fed’s GDPNow model has raised its third-quarter growth estimate from around 4% at the end of August to roughly 5% now, and the Citigroup economic surprise index has rebounded sharply as most of the latest releases beat forecasts.

That looks like an economy reliant on the blistering AI buildout to generate growth while households fall behind. The divergence in stock market performance in the face of surging yields seems to be speaking to the same split: the tech-heavy indexes tied to the buildout are holding up, while the likes of the growth- and rate-sensitive Russell 2000 absorb the pressure.

This week’s calendar will test which side carries more weight. The personal consumption expenditure (PCE) price index arrives Wednesday. Headline inflation is seen holding at 3.7% year-on-year for a third month straight, though the expected monthly rise of 0.4% would be the largest since May. Thursday brings the manufacturing PMI survey from the Institute for Supply Management (ISM), a timely read on business activity tied to the AI buildout. Friday’s US jobs report is expected to show 84,000 jobs added in September after August’s 162,000, with the unemployment rate rising to 4.2%.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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