Amid bond market concerns, US stocks retreated again, with the three major US stock indices falling for a third consecutive day and hitting two-week lows, with the Nasdaq down over 1%.
The spread for high-yield tech bonds widened to 474.9 basis points, Nvidia's credit default swap quotes nearly matched Meta's, the Philadelphia Semiconductor Index plunged 6%, memory and optical communication chips collectively plummeted, while the energy and healthcare sectors bucked the trend to lead gains.
Persistent Middle East risks and high long-term bond yields in Europe and the US; medium-to-long-term German bond yields continued to hit new highs since 2011; US Treasury yields surged then retreated during the session, with the 30-year yield hitting a new high since 2007 before turning lower.
Oil prices and the bond market decoupled unusually, with diesel in focus. Trump stated no talks with Iran but insisted the Strait of Hormuz is open, crude oil prices were largely flat, yet the diesel crack spread soared to $70, nearing the 2022 crisis high.
The S&P 500 Energy Index rose 1.8% against the trend, hitting a new high since March, gold fell below $4400, while Bitcoin surged to a one-week high during the session. Market focus shifts to the Fed meeting minutes on Wednesday.
AI Debt Concerns Brew, Tech Credit Spreads Crush Chip Stocks
On Tuesday, the S&P 500 fell 0.67% to 7693.26 points, the Dow Jones fell 0.22% to 53343.40 points, and the Nasdaq fell 1.33% to 26289.71 points, with all three indices closing lower for the third consecutive trading day.
The credit market is pricing concerns about AI sustainability into stocks.
The spread for high-yield tech bonds widened to 474.9 basis points that day, the investment-grade tech bond spread reached 136.6 basis points, 17 basis points wider than the all-industry average, at its widest level in years.
Nvidia's credit default swap quotes rose to 80.3, almost matching Meta's 84.3, with CDS spreads for AI and hyperscale companies widening across the board.
Debt supply is the root cause of the widening spreads. Goldman Sachs chief credit strategist Amanda Lynam noted that $489 billion in AI-related bond supply year-to-date has far exceeded the full-year 2025 estimate of $322 billion.
Goldman Sachs Delta-One trading desk head Rich Privorotsky believes rising interest rates are increasingly a supply issue rather than a central bank discipline issue. Massive sovereign deficits coupled with over $1 trillion in annual AI capital expenditures flooding the bond market are crowding out real economy financing, and the Fed may even be forced to raise rates if data weakens.
Chip stocks were the hardest hit, with the Philadelphia Semiconductor Index plunging 6% to 11864.18 points, its largest single-day drop since July 29. Memory chips collectively plummeted: SanDisk fell 9.01%, Seagate fell 9.16%, Western Digital fell 7.43%, Micron fell 7.02%.
The optical communications sector was even more brutal: Applied Optoelectronics fell 15.16%, Coherent fell 12.75%, Lumentum fell 9.87%, Corning fell 7.68%. ARM fell 6.67%, Intel fell 6.58%, AMD fell 4.27%, Nvidia fell 2.34%.
AI cloud service providers faced the most intense selling: CoreWeave fell 12.10%, TeraWulf fell 11.25%, Nebius fell 7.60%.
Anthropic's annualized recurring revenue of $65 billion was below Silicon Valley rumors of $80 billion, and high long-term interest rates further exacerbate the business model reliant on debt expansion.
Meta fell 4.45%, hitting a two-week low, as a lawsuit by a coalition of 29 US states began that day, led by California, Colorado, Kentucky, and New Jersey, with potential fines up to $1.4 trillion; Zuckerberg will testify in court.
Buy-now-pay-later company Klarna plunged 22.81%; although it turned a profit in Q2, it lowered full-year GMV and revenue guidance, with weak German consumption and a $600 million currency drag, and its CFO and CMO both announced their departures.
Divergence also emerged within tech giants. Apple rose 1.45% against the trend, Microsoft rose 0.27%, Google was nearly flat, with defensive attributes and the software sector attracting buying.
US Long Bonds Form V-Shape, Hit 19-Year Highs During Session, Bad Data Drives Bond Buying and Late-Session Pullback
Expiration of the US-Iran ceasefire, a July fiscal deficit of $432.3 billion (the highest since March 2021), and the flood of AI bond supply drove the 30-year yield to a session high of 5.3371%, the highest since June 2007, and the 10-year yield to 4.7478%, the highest since January 2025.
The composite yield on global government bonds returned to 2007 levels, with long-term German and French bonds also hitting multi-year highs.
The turning point came from weak data. July new home starts plunged 12.4% MoM, far worse than expected; pending home sales fell 2.3% MoM, hitting a new low for the year; industrial production also slowed. The Citi US Economic Surprise Index plunged from July highs to 15.4.
The bond market viewed bad data as a buying opportunity, with yields at the close actually 1-2 basis points lower than the previous close. The 10-year closed at 4.7060%, the 30-year at 5.2858%, about 5 basis points below the session highs.
Global macro strategist Vitali Meschoulam warned that the 2026 cross-asset rally is built on an unconfirmed assumption that real interest rates are falling. Tight credit spreads, low volatility, a weak dollar, and resilient gold are all different expressions of the same macro view.
He stated bluntly that the bond market is pricing an equilibrium cost of capital higher than the stock market, that the market is trading the destination rather than the starting point, that the current situation is not a clean soft landing, and that the real interest rate is the only rate that matters.
Diesel Crack Spread Nears 2022 Crisis Level, Energy Stocks Hit Three-Month High Against Trend
Crude oil prices were calm, but diesel was surging beneath the surface.
The US-Iran ceasefire technically expired on Monday. Trump said the US is not currently negotiating with Iran but insisted the Strait of Hormuz is open and operating normally.
WTI rose 0.52% to close at $84.94, Brent rose 0.17% to $91.02, touching $92 during the session. The US Strategic Petroleum Reserve fell to 293.4 million barrels, the lowest since 1982.
The diesel crack spread soared to $69.9, nearing the 2022 crisis high. The average retail diesel price rose to $5.45 per gallon, up 3.7% in a week.
Ukrainian drone attacks pushed Russian crude oil exports to a four-week low, with Middle Eastern and Black Sea supplies simultaneously disrupted. Refiners were the biggest winners. Jet fuel and diesel prices per barrel equivalent both approached 2022 crisis levels, while WTI was only at $84.92, creating extremely rich crack margins.
(Diesel price per barrel equivalent nears 2022 crisis high, WTI trades in narrow range)
Gold Falls Below $4400, Silver Plummets 4%, Bitcoin Soars, Dollar Steady
The US Dollar Index rose slightly by 0.05% to 99.60, flat for the week.
Precious metals and digital assets diverged. Spot gold fell 1.22% to $4361.98, losing the $4400 level, hitting a session low of $4351.57. COMEX silver futures plunged 4%.
High long-term yields still elevate the opportunity cost of holding non-yielding assets, coupled with profit-taking after gold's earlier gains. Independent analyst Ross Norman said the pullback resulted from both traditional headwinds and profit-taking.
Bitcoin, however, strengthened, approaching $65,000 during the session to hit a one-week high, closing at $64,568.
