Nasdaq Drops Over 5% as Treasury Yields Fall in Stock Rout

By Grace Kim

U.S. money-market funds held a record $8.016 trillion as a tech-led stock selloff deepened on Thursday, according to the Investment Company Institute.

The Nasdaq Composite fell more than 5% and joined the Nasdaq-100 in correction territory. The S&P 500 fell 4.2%, while the Dow Jones Industrial Average dropped 3.4%, according to FactSet.

Traders trying to cut losses flocked to shorter-term Treasury notes. The 2-year Treasury yield tumbled 10.4 basis points to 4.48%, its lowest since Sept. 9, according to Dow Jones Market Data.

What drove the flight to Treasuries?

MarketWatch described Treasurys as portfolio ballast because they offer a fixed-income stream in uncertain times. It also noted that longer-dated bonds can lose value when inflation runs hot, though inflation pressures were not Thursday’s main focus.

“What the market is reacting to is the equity weakness right now,” said Brij Khurana, a fixed-income portfolio manager at Wellington Management. Buyers of front-end Treasury notes dragged yields sharply lower as traders priced in “the tail risk that stocks go down significantly,” Khurana added.

The rise in yields this year also made longer-term bonds more attractive, MarketWatch reported. The 10-year yield climbed to 5.3% in October, a 24-year high that drew buyers.

MarketWatch reported that investors’ heavy exposure to tech stocks became a growing concern following the midterm elections, which will put Democrats in control of Congress in January. Voter opposition to data centers could stall the AI buildout and create roadblocks for its beneficiaries, one reason semiconductor stocks tracked by SOX fell sharply.

The report also said the economy and U.S. household wealth tied to stock ownership now depend heavily on the AI buildout. Fears of a negative shock to either pushed more cash to the sidelines, contributing to the record money-fund total.

“Sometimes selling begets more selling, and that seems to be the case today,” said Mike Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management. He added: “With such a dramatic selloff in equities today, and other risk assets repriced accordingly, Treasurys are proving that they will serve as the risk-free asset.”

Khurana’s conclusion was direct: Thursday’s Treasury rally reflected the equity selloff rather than a renewed focus on inflation.

How did the selloff change Fed expectations?

The equity pain appeared to reduce expectations for a December interest-rate hike by the Federal Reserve. The CME FedWatch Tool put the probability at 66.1% Thursday, down from 82.7% a day earlier. Markets also expected fewer rate hikes through March.

In an October press briefing after the central bank held rates steady, Fed Chairman Kevin Warsh said he wasn’t looking to “throw sand in the gears of the economy and throw people out of work.”

“We still think the Fed hikes twice — once in December and in March,” said Leslie Falconio, head of fixed-income strategy at UBS’s Chief Investment Office. “But there’s a cap on how much the Fed can be restrictive.”

Falconio said UBS’s team does not expect the AI buildout to stop or the economy to falter. The buildout could take longer after the Democrats’ “blue sweep.” She also sees less concern about growth overheating that would require the Fed to deliver aggressively tighter financial conditions.

The practical split: falling equities reduced the December probability, while UBS still expects two Federal Reserve increases through March.

What could Friday’s jobs report change?

MarketWatch noted that growth scares tend to send longer-dated Treasury yields sharply lower. Yet the 10-year yield fell only 5 basis points to 4.48% on Thursday, according to FactSet, even as the 2-year also stood at 4.48%. Falconio said the smaller long-end move could reflect hesitation ahead of Friday’s jobs report for October.

Wall Street expects the report to show a healthy labor market, albeit one stuck in a low-hire, low-fire scenario. A strong report could pressure equities more than bonds, Khurana said.

Friday’s October jobs report is the next test, and a strong result could weigh more on stocks than Treasurys, according to Khurana.