US stocks drop as Treasury yields breach 5% and oil surges

Wall Street fell on Tuesday as the benchmark 10-year US Treasury yield breached 5 per cent for the first time in nearly two decades and crude oil prices surged, compounding fears of prolonged inflation.

The S&P 500 fell 0.4 per cent, while the tech-heavy Nasdaq Composite dropped 0.8 per cent. The Dow Jones Industrial Average shed 0.6 per cent, as investors confronted a double shock of rising energy costs and soaring borrowing rates just ahead of the Federal Reserve's interest rate decision on Wednesday.

Why the 5% Treasury yield matters

The 10-year Treasury yield, a critical benchmark that influences borrowing rates globally, climbed as high as 5.04 per cent during the session—a level not seen since 2007. Higher yields make government bonds highly attractive compared to equities, while also driving up the cost of debt for households, businesses, and the government.

"The result is a market that must work harder to generate earnings growth just as investors become less willing to pay premium valuations for that growth," said Darrell Cronk, president of the Wells Fargo Investment Institute.

Oil prices compound inflation fears

Oil prices added to the pressure following a volatile trading session. Brent crude, the international benchmark, jumped 3.5 per cent to settle at $109.35 a barrel, while US West Texas Intermediate crude rose over 2 per cent to $103.85.

The price spike followed drone and infrastructure attacks on Saudi Arabia’s East-West pipeline, which took the facility offline. The disruption has revived fears of prolonged global inflation, especially as the conflict with Iran, which began in February, continues to threaten shipping routes through the Strait of Hormuz.

The Federal Reserve's next move

The energy shock arrives at a delicate moment. The Federal Reserve is widely expected to announce an interest rate hike on Wednesday. Futures markets are pricing in a 92 to 93 per cent probability of an increase, which would mark the first rate hike in three years. Investors are also waiting for the central bank's updated economic forecasts to gauge how long rates will remain high.

Consumer-focused companies bore the brunt of the market sell-off on Tuesday. Dave & Buster’s Entertainment tumbled 19.7 per cent after reporting weaker-than-expected quarterly results. Chipotle Mexican Grill dropped 6.3 per cent, Dollar Tree fell 4.2 per cent, and United Airlines lost 2.2 per cent.

Mixed day for tech and AI

Technology and artificial intelligence stocks saw a mixed performance after a sharp global sell-off in the previous session. Alphabet and Microsoft both declined in pre-market trading, but some chipmakers managed a modest recovery. Nvidia gained 0.5 per cent, while Advanced Micro Devices rose 2.2 per cent.

However, the sector remains under scrutiny. Prominent industry leaders have publicly called for a slower pace of AI development over safety and unpredictability concerns. Anthropic chief executive Dario Amodei is among those urging caution, raising questions among investors about whether the massive corporate spending boom in AI is starting to face structural headwinds.