Wall Street closed sharply lower on Wednesday following spike in yields of long-dated U.S. sovereign bonds. Market participants remained concerned that the proposed tax-cut bill of President Trump will further worsen U.S. fiscal deficit. The U.S.-China tariff war also remained unresolved. All three major stock indexes ended in negative territory.

How Did The Benchmarks Perform?

The Dow Jones Industrial Average (DJI) plummeted 1.9% or 816.80 points to close at 41,860.44. Notably, 29 components of the 30-stock index ended in negative territory and one finished in positive zone. The tech-heavy Nasdaq Composite finished at 18,872.64, sliding 1.4% due to weak performance of technology bigwigs. 

Technology giants like Microsoft Corp. (MSFT Quick QuoteMSFT - Free Report) and Apple Inc. (AAPL Quick QuoteAAPL - Free Report) fell 1.2% and 2.3%, respectively. Both stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The S&P 500 tumbled 1.6% to finish at 5,844.61. All 11 broad sectors of the broad-market index ended in negative territory. The Consumer Discretionary Select Sector SPDR (XLY), the Financials Select Sector SPDR (XLF), the Health Care Select Sector SPDR (XLV) and the Real Estate Select Sector SPDR (XLRE) decreased 2%, 2.1%, 2.3% and 2.7%. 

The fear-gauge CBOE Volatility Index (VIX) was up 15.4% to 20.87. A total of 19.39 billion shares were traded on Wednesday, lower than the last 20-session average of 17.34 billion. The S&P 500 posted 15 new 52-week highs and four new 52-week lows while the Nasdaq Composite recorded 53 new 52-week highs and 92 new 52-week lows.

Spike in Yields of U.S. Sovereign Debt

Yields on long-dated U.S. government securities spiked following the proposed tax-cut bill of the Trump administration. House republicans from Democrat-controlled states raised questions on the tax deduction allowed for state and local taxes (SALT) on federal income tax returns. 

The 2017 Republican tax bill capped SALT deductions at $10,000 and the current tax bill has raised the limit to $30,000. But a section of Republican legislators disapproved it as not high enough. House Speaker Mike Johnson introduced changes to President Trump's tax-cut bill, including a more generous deduction for SALT with more changes to the package additional concessions.

A rough estimate has shown that the proposed tax cut will generate $3 to $5 trillion extra burden on the U.S. government exchequer. The United States is currently facing a gigantic $36.2 trillion fiscal deficit. On May 16, after the closing bell, Moody’s Investor Services downgraded the U.S. sovereign credit rating by one notch to Aa1 from Aaa. 

Moody’s is the third major rating agency after the S&P 500 Global and Fitch to downgrade the U.S. sovereign credit rating. The rating agency cited the growing burden of financing the federal government’s outstanding budget deficit of a mammoth $36 trillion and the rising cost of rolling over existing debt under the high-interest rate regime.

Given the concerns of the U.S. fiscal prudence, on May 21, the auction for 20-Year U.S. Treasury Notes had a lackluster demand from investors. Market participants shorted long-dated government securities. 

As a result, yield on the 30-Year U.S. Treasury Note last traded around 5.09%, touching the highest level going back to October 2023. Similarly, the yield on the benchmark 10-Year U.S. Treasury Note spiked to 4.59%, its highest level since mid-February. 

Economic Data

For the week ended May 16, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.3 million barrels from the previous week.