Ten-year yield tops 5% on Fed eve

Stocks fell again on Tuesday, the day before the Federal Reserve announces its interest rate decision. The S&P 500 closed down 0.45% at 7,585.73, the Dow Jones Industrial Average lost 328.63 points, or 0.63%, to 52,092.57, and the Nasdaq Composite fell 0.56% to 26,186.41. Behind those modest index moves were two much larger ones: the 10-year Treasury yield finished at 5.00% after touching 5.047% overnight, its highest since 2007, and Brent crude oil rose 2.75% to $108.59 a barrel.

Two prices moved against stocks at the same time, and neither of them is a stock price.

The first is oil. Saudi Arabia's East-West pipeline, the only remaining route for getting crude out of the Persian Gulf while Iran blockades the Strait of Hormuz, is still shut, which removes roughly 5 million barrels a day of export capacity from a market that was getting Brent at $72 back in July. Expensive oil pushes up the cost of everything that has to be shipped, refined, or driven, so it makes the inflation problem the Fed is trying to solve harder rather than easier.

The second is the 10-year Treasury yield, and this is the one worth slowing down on. The Fed sets the federal funds rate, which is the overnight rate banks charge each other and currently sits at 3.50% to 3.75%. It is widely expected to raise that by a quarter of a percentage point on Wednesday, the first increase in three years. But the Fed does not set the 10-year yield. That number is decided by investors bidding for government bonds, and when they are unsure how much inflation will eat into a decade of fixed payments, they demand extra compensation for the uncertainty, a cushion known as the term premium. That cushion is what pushed the 10-year above 5% this week.

A higher risk-free yield drags on stocks through simple arithmetic. A share is a claim on profits a company will earn years from now, and to decide what those future profits are worth today, investors compare them against what a government bond pays for taking no risk at all. When the safe alternative pays 5%, the same future profits are worth less, so share prices fall even if nothing about the companies has changed. The damage was worst in consumer names, where expensive fuel also takes money straight out of household budgets: Dave & Buster's fell 19.7% after weak quarterly results, Chipotle Mexican Grill lost 6.1%, and Dollar Tree dropped 4%. Artificial intelligence stocks, which led Monday's slide, steadied, with Nvidia up 0.5% and Advanced Micro Devices up 2.1%.