Dow Jones Industrial Average tests fresh lows as long bond yields climb

• DJIA slides to 51,100, its lowest since June, as 30-year yields reach a 2004 high.
• Philadelphia Fed President Paulson backs more hikes with rates at 3.75-4.00%.
• 30-year mortgage rates near 7%, a full point higher than before the Iran war.

The 30-year Treasury yield rose to its highest since 2004 on Thursday while the two-year yield barely moved, and the Dow Jones Industrial Average is falling with the long one. The index dropped as far as 51,100, its lowest since June, and is on track for a third losing session in a row.

Two-year yields follow what traders expect the Fed to do over the next couple of years. The 30-year follows what investors want paid for lending to Washington for three decades, and that price is the one still going up. Two Fed officials spent Thursday talking about the rate the Fed sets, and the market repriced the one it doesn't.

The end of forward guidance, announced with forward guidance

New York Fed President Williams told a London conference on Thursday that the era of explicit forward guidance is over, the same line Fed Chair Warsh has taken. In the same remarks he said market bets on another hike before year-end looked reasonable to him.

Philadelphia Fed President Paulson, a voter this year who had favoured holding rates before the September meeting, said a little more tightening may be needed after the September 16 hike to 3.75-4.00%. She put the new inflation pressure down to the Middle East conflict and the artificial intelligence build-out, with tariff pressure easing.

The two-year yield is close to its 2023 high and didn't react to either speech, so for the Dow the next quarter-point is already in the price. Futures price an October hike as more likely than not, and 16 of 18 policymakers projected at least one more this year. President Paulson's warmest words on underlying inflation were that it hasn't gotten worse this year, which is the case for another hike delivered as praise.

The mortgage market has already done four hikes' worth of tightening

Investors want more to lend for 30 years because the Iran war has kept energy expensive, growth has held up and governments keep borrowing. Brent traded near $105 a barrel on Thursday. Japan's 10-year yield reached its highest since 1996 as Tokyo reopened after a three-day holiday, and Germany's finance agency expects record federal borrowing of €525.5 billion in 2026.

Bank of America analysts put US federal interest costs at a record 3.3% of Gross Domestic Product (GDP) in the second quarter, up from 1.7% the last time the 10-year yield was near 5% in 2007. Chair Warsh can raise the overnight rate at any meeting, but the 30-year yield is set by people who have to hold the bond until 2056.

The 30-year mortgage rate is near 7%, a full point above where it was before the war. The first Dow members exposed are Home Depot (HD) and Sherwin-Williams (SHW), which sell hardware and paint into a housing market where fewer people move at 7%. JPMorgan Chase (JPM) is the member that could come out ahead, because a bank borrows short and lends long, and a wider gap between two-year and 30-year yields could lift what it earns on new loans.

Levels that change the reading

Resistance: 51,500 is Wednesday's close, and Thursday opened beneath it and hasn't traded back above it since. Above that, 52,000 is the level the index gave up on Tuesday and hasn't regained, and each session since has made a lower high.

Support: Thursday's low near 51,100 took out the September 16 low and is the lowest since June, though buyers took back most of the drop off that low. 51,000 is the next round number beneath it.

Bias: The lean is short below 52,000, with 51,000 as the first objective and the 200-day Exponential Moving Average (EMA) near 50,250 as the second. The daily Stochastic Relative Strength Index (Stoch RSI) is near 19, its first reading under 20 since late July, so a bounce toward 51,500 could come first without changing the call. A daily close above 52,000 ends the short case.

Dow Jones daily chart