Economist's Insights

Today’s Trading Activity – Stocks Slide and Treasury Yields Spike as U.S. House Votes Yes on Tax Reform:

Dec 19, 2017

Shares of U.S. tech companies tumbled Tuesday, as evidenced by the Nasdaq’s underperformance, but was part of broader selling that created daily losses for the big three indices. The equity weakness evolved despite the House passing the tax bill and sending it along to the Senate for debate and a vote (after markets closed, the Senate kicked the bill back to the house for another vote because some of the provisions violated Senate budged rules). For the day, the Dow dropped less than 0.1% as the S&P slipped 0.2% and the Nasdaq dropped 0.4%. While the Nasdaq lost the most, the tech sector was just the fourth worst performer within the S&P behind telecoms, utilities, and real estate related companies. Those other sectors, sometimes considered bond proxies, experienced bigger declines at least in part because of the big moves in the Treasury markets. The long-end of the curve whipped the most, with the 30-year yield rising 7.9 bps to 2.82%. Added to Monday’s 5.3 bps rise, the Tuesday move made it the biggest two-day yield increase of the year for the Long Bond. The 10-year yield rose another 7.0 bps, taking its two-day total increase to 11.1 bps, the largest since September (fourth largest of 2017). There were a confluence of factors that likely played a part in the upshift in yields. While stocks have run higher in anticipation of tax reform, longer Treasury yields have been almost immovable; actual passage may have finally loosened the lid a touch. Also applying pressure were higher yields in Europe. Yields had already made most of their climb before the afternoon House vote with some traders pointing to speculation about the nature of future supply in some European countries and some hawkish comments from a well-known hawkish ECB official.