Stocks on Wall Street dropped for the second consecutive session on Wednesday as investors stepped back to assess the effect on equities from US Treasury yields hitting their highest levels in a year.

The benchmark S&P 500 index fell 0.5 per cent and the technology-focused Nasdaq Composite lost 1.4 per cent by lunchtime in New York. The dollar, as measured against a basket of currencies, strengthened 0.5 per cent as investors moved into the haven asset.

During a primetime televised town hall meeting on Tuesday, US president Joe Biden pledged that his $1.9tn coronavirus relief plan, which is awaiting congressional approval, would create 7m jobs this year. “Now’s the time to go big,” he said.

The comments added further momentum to the sell-off in government debt since the US election in November. Prospects of a stimulus-fuelled recovery in the world’s biggest economy have fed expectations of higher inflation, which erodes the value of bond coupons.

The 10-year US Treasury yield hit 1.33 per cent on Wednesday, its highest since late February 2020, before sliding to 1.27 per cent.

Line chart of 10-year Treasury yield (%) showing US government bonds have sold off with rising stimulus hopes

The government bond sell-off has given equity investors pause for thought, not least because a move higher in debt yields increases their attraction, relative to stock dividends, for new investors.

“Everyone was already very cautious on equities and talking about bubbles,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management. “So you can see the rise in [bond] yields is an excuse for a bit of a correction.”

Equities have rallied since last March, when central banks responded to the pandemic by increasing their purchases of government bonds, sending 10-year Treasury yields to less than 0.5 per cent.

Ahead of Biden’s Tuesday broadcast, the US S&P 500 index and the FTSE All-World index hit all-time highs before the rally faded.

However, many investors still believe bond yields and share prices can rise in tandem, powered by expectations of strong growth in the US.

“We remain positive on equities,” said Bastien Drut, senior strategist at CPR Asset Management, “because although bond yields have room to rise further, the rise in yields and the rise in equities are coming from the same place, which is economic growth.”

A survey of global fund managers by Bank of America found more than half of the 204 respondents remained bullish towards equities, while just 13 per cent believed stocks were in a bubble.

Oil prices continued their ascent, with international benchmark Brent crude rising 0.5 per cent to $63.69 a barrel.

In Europe, the Stoxx 600 equity index closed down 0.7 per cent and Germany’s Xetra Dax lost 1.1 per cent while London’s FTSE 100 dropped 0.6 per cent.