In a significant market downturn on Tuesday afternoon, US stocks experienced a sharp decline as Treasury yields reached their highest levels in over a decade. This surge in yields raised concerns among investors about the possibility of higher borrowing rates, which could potentially impede the housing market’s recovery.

The Dow recorded a substantial drop of 430 points, equivalent to 1.3%, marking its lowest closing point since June and pushing it into negative territory for the year. Similarly, the S&P 500 fell by 1.4%, achieving its lowest close since May. The Nasdaq Composite extended the late summer selloff with a 1.9% loss.

The Federal Reserve had signaled in the previous month that it might implement one more interest rate hike this year and maintain elevated rates into the following year. Investors are now expressing concerns that the housing market could face challenges, becoming a potential trigger for a broader economic recession.

While the Fed doesn’t directly determine mortgage interest rates, its actions significantly influence them. Mortgage rates typically follow the yield on 10-year US Treasuries. Consequently, as Treasury yields rise, mortgage rates also increase.

The stock market had enjoyed a prolonged upward trend throughout the year, fueled by enthusiasm for artificial intelligence (AI) that gripped Wall Street and propelled tech stocks to unprecedented levels. However, this rally lost momentum in August as robust economic data raised fears among investors that the Federal Reserve might keep interest rates higher for an extended period to control inflation.

Following the late-October meeting of the Fed, Treasury yields spiked, and the US dollar surged, eroding gains made by the stock market in the spring. Elevated government bond yields tend to negatively impact stocks since investors can secure high returns from less risky assets.

Yields continued their ascent on Tuesday, accelerating after new data from the Bureau of Labor Statistics revealed an unexpected increase in US job openings. The estimated 9.61 million open jobs in August surpassed the upwardly revised July estimate of 8.92 million and exceeded the economists’ consensus of 8.8 million.

The 10-year Treasury note’s yield on Tuesday reached 4.802%, the highest level since August 2007, while the 30-year yield stood at 4.936%, its highest since September 2007.

CNN’s Fear & Greed Index plummeted to an “Extreme Fear” reading of 16, the lowest since last October. Meanwhile, West Texas Intermediate crude futures, the US oil benchmark, dipped below $90 on Tuesday, responding to OPEC+’s announced output cuts that began to impact oil prices.

Looking ahead, the Bureau of Labor Statistics is set to release August employment figures later this week. Ed Moya, senior market analyst at OANDA, suggested that unless the jobs report comes in lower than expected, Wall Street may fully anticipate at least one more Fed rate hike before year-end.

Further contributing to market volatility is the aftermath of a narrowly avoided federal government shutdown over the fiscal budget. House Republicans are voting on the possible removal of Speaker Kevin McCarthy due to his collaboration with Democrats to prevent the shutdown.

Michael Reinking, manager of NYSE research, commented on the challenging political backdrop, emphasizing that the recent developments in the House underscore the difficulties in addressing such issues. Moody’s, the sole major credit rating firm maintaining a perfect credit rating for the United States, cautioned that a government shutdown would be “credit negative,” potentially leading to a downgrade amid increased political disorder.