In the early hours of May 22, local time, U.S. stocks suffered a sharp decline on Wednesday. The Dow Jones Industrial Average plummeted over 800 points, while the Nasdaq and S&P 500 also saw significant drops, reflecting investors' growing concerns about the worsening U.S. fiscal situation. The primary cause of this market volatility was the sharp rise in U.S. Treasury yields, with traders fearing that the new Republican-led tax reform bill would further increase the already heavy fiscal deficit.
Data showed that the Dow closed down 816.80 points, a decline of 1.91%, at 41,860.44 points; the Nasdaq dropped 270.07 points, a decline of 1.41%, to 18,872.64 points; and the S&P 500 index fell 95.85 points, or 1.61%, closing at 5,844.61 points.
In the bond market, U.S. long-term Treasuries faced a massive sell-off, driving the 10-year Treasury yield up to 4.59% and the 30-year yield to a high of 5.08%. As the Memorial Day deadline of May 26 set by House Speaker Mike Johnson approaches, the market expects the tax reform bill to be passed following a compromise on state and local tax deductions.
Sam Stovall, Chief Strategist at CFRA Research, noted that investors' anxiety centers around the possibility that the new tax bill could undermine previous fiscal tightening efforts, potentially increasing debt levels. Signs have already emerged that investors are betting the 10-year Treasury yield could surpass 5% in the coming weeks, with one large wager featuring an option premium as high as $11 million.
Jim Reid, a strategist at Deutsche Bank, warned that the U.S. fiscal situation is like a "death by a thousand cuts," with risks nearing a critical point. Former Treasury Secretary Mnuchin also called for prioritizing fiscal consolidation, stressing that the budget deficit is more concerning than the trade deficit.
Driven by the rise in Treasury yields, U.S. mortgage rates soared to a three-month high. According to the Mortgage Bankers Association (MBA), the rate on 30-year fixed mortgage contracts rose to 6.92%, and both home purchase and refinancing applications fell by about 5%.
The uncertainty in economic policy is also leading Wall Street giants to adjust forecasts. Institutions such as JPMorgan and Goldman Sachs have raised their Treasury yield forecasts, pointing out that the structural instability in current trade and monetary policies will continue to push long-term yields higher.
Meanwhile, the German economy is also facing challenges. The German Council of Economic Experts has revised its 2025 economic growth forecast down from 0.4% to 0.0%, reflecting severe industrial downturns and fiscal tightening pressures. The Trump administration's announced tariff policy is also expected to impact Germany's export-oriented economy.
Overall, the combined hits from Washington's tax reform battles and the global economic slowdown have heightened market concerns about future economic growth and debt sustainability. The persistent rise in Treasury yields not only reflects fiscal pressure but also signals increasing instability in global financial markets.
