U.S. stocks fell on Tuesday, with the S&P 500 falling 1.8 percent by midday, putting the index on track for its worst day since May.
The trigger for Tuesday’s sell-off was a rise in the yield on the benchmark 10-year Treasury note. Investors, weighing the prospect of the Federal Reserve preparing to reduce its purchases of government debt, sold off bonds, pushing the 10-year’s yield up to 1.53 percent, its highest level since June.
Government bond yields are the basis for borrowing costs across the economy, and a rise can hinder the stock market’s performance because it makes owning bonds more attractive and can discourage riskier investments.
Tech stocks are particularly sensitive to the prospect of higher interest rates, and those companies’ shares were hard-hit on Tuesday. The tech-heavy Nasdaq composite was down 2.5 percent at midday.
Etsy, the online craft marketplace, was off 7.5 percent in the morning, and Shopify was off 5.2 percent. Both companies have soared during the pandemic and were still up more than 20 percent for the year.
“With tech stocks, you’re betting for a company to have a breakthrough years from now,” said Beth Ann Bovino, the chief U.S. economist at S&P Global. “If interest rates go up today, that value that you receive years from now is discounted.”
The vast pull the big tech companies have — particularly Amazon, Apple, Microsoft, Google and Facebook — also helped drag down the S&P 500. Apple was down 1.9 percent and was the best performer of the tech giants. Amazon, Microsoft, Facebook and Google were down by 2.5 percent or more.
Somewhat offsetting the drop in technology stocks was a rally in energy stocks. Schlumberger, Baker Hughes and Marathon Oil were among the best-performing shares in the S&P 500.
The trading echoes the volatility of earlier this year, when a jump in rates roiled financial markets. That rise happened as traders worried that higher inflation might cause the Fed to increase rates sooner than they had forecast.
“There’s no doubt that the equity market does not like higher rates — there’s just no debate about it,” Ralph Axel, director of U.S. Rates Strategy at Bank of America.
Investors were also concerned as Treasury Secretary Janet L. Yellen warned lawmakers on Tuesday of “catastrophic” consequences if Congress does not deal with the debt limit before Oct. 18. Ms. Yellen suggested that a default would jeopardize the dollar’s status as the international reserve currency.
Lauren Goodwin, an economist at New York Life Investments, wrote in a note to investors that risks like that “should do little to impact the broader fundamental environment.”
She said the forces affecting investor confidence would instead remain those that have been most at play throughout the past 18 months.
“The path will depend heavily on our three highly uncertain drivers — the pandemic, monetary policy and fiscal policy,” she wrote.