Nasdaq slides, yields elevated as Mideast conflict fears grow

U.S. government bond yields saw a slight decline on Tuesday, though longer-dated yields remained near multi-year peaks as Middle East conflict fears intensified and inflation concerns grew. Oil prices rose slightly, gaining for a third consecutive day as the chances of a U.S.-Iranian peace deal diminished following Tehran's announcement of a more aggressive stance.

Traders now estimate a 35% probability of a Federal Reserve rate hike at the September meeting, but a 68% chance of an increase by December. Macro strategist Will Compernolle noted the ongoing Iran conflict is adding to worries about the U.S. fiscal trajectory. The 30-year Treasury bond yield dipped 2.32 basis points to 5.2868%, while the 10-year note yield fell 1.6 basis points to 4.708%.

The rise in U.S. yields coincided with Japanese government bond yields hitting 30-year highs, raising concerns that domestic investors might shift capital out of U.S. debt and into Japanese bonds, potentially adding upward pressure on Treasury yields. Japan's 10-year bond yield approached its lowest level in over two decades, while European bond yields also reached multi-year peaks.

Market sentiment turned cautious as Wall Street's major indexes reached their lowest levels in two weeks, hurt by losses in major technology stocks. Elevated yields could signal a tighter borrowing environment, making stocks less attractive and raising costs for companies investing in AI infrastructure. The Nasdaq Composite dropped 1.05%, the Dow Jones Industrial Average fell 0.12%, and the S&P 500 declined 0.50%.

Investors are now closely watching the Federal Reserve's policy meeting minutes, scheduled for Wednesday, and the upcoming Jackson Hole symposium, which will provide insights into policymakers' interpretations of recent economic data.