Nasdaq record close as borrowing costs hit 20-year high

The S&P 500 rose 0.66% to close at 7,773.95, and the Nasdaq Composite gained 1.05% to 27,477.31, a record close, with the Nasdaq 100 setting a record of its own. The Dow Jones Industrial Average lagged well behind at up 0.18% to 51,267.90, because it holds fewer of the big technology names that did the lifting. The odd part of the day was underneath: the yield on the 30-year Treasury bond, meaning the annual return the government has to promise investors to borrow for 30 years, rose to 5.67%, and the 10-year reached 5.33%, both the highest in about two decades.

The day's pivotal data point was the ISM services survey, a monthly questionnaire sent to purchasing managers at service companies asking whether business conditions improved or worsened. Overall activity cooled slightly, to 54.9 from 55.4 in August, but the part investors fixed on was the prices paid component, which climbed to 74.0 from 72.6 and means a large and growing majority of those firms are paying more for what they buy. The survey's chair noted that fuel costs came up twice as often as any other complaint, which is the fingerprint of oil having spent weeks at elevated levels, with Brent crude holding above $100 a barrel even as it eased on Monday.

Here is the chain that connects a survey to a bond yield. Service businesses are roughly three quarters of the American economy, so when their costs rise they eventually raise prices to customers, which is inflation. Anyone lending money for 30 years has to be paid enough to cover that future inflation and still come out ahead, so when inflation looks stickier, lenders demand a higher yield, and the only way existing bonds can offer a higher yield is for their prices to fall. That is what happened on Monday, and it is why long-term borrowing costs can rise on a day with no Federal Reserve action at all.

So why did stocks go up anyway? Because the stock market was reacting to a different piece of news. Friday's jobs report came in soft, which lowered the odds that the Federal Reserve raises its short-term interest rate again this month, and cheaper short-term money is good for fast-growing technology companies that borrow to expand. The result was two markets pointing opposite ways: easing pressure at the short end, rising inflation compensation at the long end. Deal news helped too. PTC jumped about 33% after France's Schneider Electric agreed to buy it for $22.6 billion, and RXO rose more than 22% after C.H. Robinson agreed to buy the freight broker for $5.8 billion, both reminders that companies with cash are still willing to spend it. Nvidia rose 2.1% to its own record close, while Nike fell 2.88% after a credit rating downgrade from S&P.