On Wednesday (Thursday AEST), US financial markets took a substantial hit, with stocks, bonds, and the US dollar experiencing declines amid rising concerns about the stability of American assets. The Dow Jones Industrial Average dropped by 817 points, representing a 1.91 per cent decrease, marking its worst performance in a month. The S&P 500 and Nasdaq Composite also faltered, falling by 1.61 per cent and 1.41 per cent, respectively.
The downturn coincided with a disappointing auction of 20-year US Treasury notes, which malfunctioned as investor demand waned, as described by Chip Hughey, a managing director at Truist Advisory Services. Although 20-year bonds generally attract less attention than their shorter- and longer-term counterparts, the heavy focus on Treasuries followed Moody’s downgrade of the US government debt last week. This downgrade moved the credit rating from Aaa to Aa1, intensifying scrutiny on the nation’s escalating deficit and debt burden.
The recent Treasury auction sold over $16 billion worth of 20-year bonds, settling with a yield above 5 per cent for the first time since early February. This increase in yield indicates that investors are seeking higher returns to offset perceived risks associated with US debt. Notably, the auction’s yield rose to 5.04 per cent, a significant leap from the 4.83 per cent recorded during a previous auction of the same duration.
Investor anxiety has been further compounded by worries about the ramifications of President Trump’s proposed tax legislation, dubbed by him as a “big, beautiful” bill, which could exacerbate the federal deficit and increase the national debt at a time when safe-haven status for US assets is under scrutiny.
In the wake of the Moody’s downgrade, Treasury yields have surged, with the 10-year note reaching 4.59 per cent—the highest since February—and the 30-year note surpassing 5 per cent, the highest level recorded in 2023. Such fluctuations in bond yields can divert investor interest from equities, thereby exerting additional pressure on the stock market.
As of Wednesday, equities were already under strain amidst Republican efforts in Congress to advance Trump’s tax proposals. Experts express that ongoing budgetary challenges in Washington are magnifying uncertainties for global investors, leaving them doubtful about the US’s fiscal direction.
The federal debt now represents 123 per cent of the gross domestic product (GDP), a steep increase from 104 per cent in 2017. Economists caution that the current trajectory of national debt and deficits may reach unprecedented levels, echoing concerns typically raised during recessionary periods.