Dow falls 500 pips, Nasdaq loses 2.7% as yield spike hits tech shares

US stocks fell Tuesday, with technology stocks dragging the Nasdaq and broader markets as government bond yields traded near three-month highs.

The Nasdaq Composite was down 2.7% and the S&P 500 was down nearly 2%. The Dow Jones Industrial Average lost 513 points, or around 1.5%.

The US 10-year Treasury yield continued to surge on Tuesday, rising to 1.558% as investors bet the Fed would keep its promise to curb its emergency bond purchases as inflation rises. The 10-year yield has turned dramatically to its highest level since June since the Fed signaled last week that it would “soon” scale back its $ 120 billion monthly bond purchases.

The 10-year rate was 1.29% once last week and even 1.13% in August. The 30-year Treasury yield was also moving, topping the 2% mark.

“The market has become increasingly aware of the reality that returns have been terribly low compared to fundamentals. Now the Fed is moving, and everyone is moving their positions at once, like we normally do, ”said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.

Tech stocks fell in morning trading as a rapid rise in interest rates made their future cash flows less valuable and, in turn, made popular stocks appear overvalued. Higher interest rates also hamper tech companies’ ability to fund their growth and buy back stocks.

Facebook and Alphabet stocks lost more than 3%, while Amazon lost 2.9%. Large chip stocks struggled, with Nvidia down 4%.

The decline in technology weighed on sentiment in the markets, even though there were strengths. Energy stocks like Exxon rose early in trading as WTI crude topped $ 76 a barrel. Ford’s shares rose 1.3% after the company announced plans to build new manufacturing facilities in the United States

“I actually had a little déjà vu last fall, if you remember last September when we saw interest rates move a little and technology react,” said Jeff Kilburg, chief investment officer, Sanctuary Wealth. “And selling pressures in technology were really a catalyst for reflation and rotation trading last fall, and here we are again.”

The mood also weighed on a household showdown in Washington. Senate Republicans on Monday blocked a House of Representatives bill that would have funded the government into December, and suspended the debt ceiling until December 2022. Congress must approve government funding by Friday to avoid a shutdown, and Treasury Secretary Janet Yellen warned Congress in a letter on Tuesday that lawmakers must raise the debt ceiling by October 18 to avoid a government default.

Federal Reserve Chairman Jerome Powell told the Senate Banking Committee Tuesday that inflation could last longer than expected.

“Inflation is up and likely to remain so for the months ahead before it eases,” Powell said. “As the economy continues to open up and spending recovers, we see upward pressure on prices, particularly due to supply constraints in some sectors. These effects were bigger and longer-lasting than expected, but they will subside, and with it inflation. “Is likely to slide back towards our longer-term 2 percent target.”

The central bank said last week that it was ready to begin “tapering” – the process of slowly withdrawing the stimulus it provided during the pandemic. The Fed left rates unchanged, but may be planning one rate hike in 2022, followed by three each in 2023 and 2024.

Thursday marks the last trading day of September and the third quarter. As of Monday, the Dow was down 1.4% for the month and the S&P 500 down 1.8%. The Nasdaq Composite lost 1.9% in September.

The Covid-19 Delta variant, the Federal Reserve’s tapering plan and inflation have worried investors. However, despite the weakness in September, the Dow is still up nearly 14%. The S&P 500 and the Nasdaq are also significantly higher.

– with reports from CNBC’s Patti Domm.