A Big Ugly Bond Reaction to a Big Beautiful Bill
Bulls just got 'sucker-punched' by something the market tends to take in stride — and the gap in the index charts is now in play.
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Recent weakness in bonds and higher interest rates have been signaling trouble in paradise lately, but equities continued to hold up quite well. Well, the good times ended on Wednesday when a very poor bond auction sucker-punched the equity bulls and sent the indices sharply lower.
A relatively small auction of 20-year bonds went poorly and caused a sharp jump in yields on longer-term debt. The iShares 20+ Year Treasury Bond Fund TLT dropped to its lowest level since October 23 and has very little support before levels last seen in 2007.
Pressure on bonds and the dollar has been building for a while, but the tipping point appears to be the "Big Beautiful Tax and Spending Bill," which contains far more spending than many fiscal hawks were hoping to see. This bill also gives some weight to Moody's Ratings' recent downgrade of U.S. debt.
Equities have handled higher interest rates rather well, but they reacted very swiftly to this bond auction. It was an unusually large response to something that the market tends to take in stride, which signals that interest rates may now be a much more important issue than they were yesterday.
The selling was intense, with breadth of more than 5 to 1 negative. The Nasdaq 100 QQQ sank about 1.4%, but it was the Russell 2000 small-caps IWM that were hit the hardest with a loss of 2.8%. Most notably, the IWM fell back into the gap that was created on May 12 when China tariffs were cut back. The gap is only about 56 cents from being totally filled and giving back all of those gains.
The larger indexes are not nearly as weak and are not even back to the top of the gap on their charts, but that gap is now more magnetic, and it is going to be tough to resist their pull.
This was a significant reversal Wednesdayt, and there is a good chance of further downside before support can be found.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
