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London - Selling pressure on 10-year US Treasuries drove yields to fresh six-month highs on Monday as investors threatened to undo this year's bond rally on signs of global economic recovery and deeper US deficits.
World shares climbed with gains in Japan and Europe, adding to an end-of-year rally. Chinese shares posted their biggest gains in two month as fears of interest rate increases dissipated.
The dollar rose against a basket of major currencies, lifted by prospects for higher returns on U.S. assets.
U.S. Treasury yields were up around 4 basis points to around than 3.367%, having earlier hit levels not seen for six months. Yields - which move inversely to prices - shot up as much as 20 basis points last Wednesday alone on a combination of expectations that the US economic climate will improve and worries that proposed extensions of tax cuts will bloat the fiscal deficit further.
Investors have also begun reappraising the likelihood of further bond-buying by the US Federal Reserve after its current $600bn quantitative easing programme is completed.
Monday's selling had some impact on short-term US paper, suggesting investors may begin pricing in raised expectations of higher interest rates next year.
"If the market really thinks there will be a rate hike within a year, then the two-year yield could rise near 1%," said Tomoaki Shishido, a fixed-income analyst at Nomura Securities in Tokyo, adding that he did not believe there would be such as rate rise.
The two-year note was yielding 0.66%, up a basis point and off its highs.
Wariness about holding low-yielding government debt had little impact on European paper, where the 10-year German Bund yield was flat.
Fx and stocks
European bond trading is complicated by the euro zone debt crisis, which will be the main subject later in the week at an EU summit seeking some way of stabilising pressure on the debt of the currency bloc's weaker economies.
The euro was again a victim of the concern, falling 0.1% to just above $1.32. The shared currency has come under additional pressure from expectations that US assets will yield higher returns.
Currency speculators trimmed short positions against the dollar last week but more than doubled their bets against the euro, according to data from the Commodity Futures Trading Commission, signalling growing bearishness on the currency.
On stock markets, meanwhile, investors were cautiously building up gains before the Christmas/New Year break.
MSCI's all-country world stock index was up 0.2% for a more than 8% year-to-date gain.
"Market sentiment is bullish because of strong economic data and some positive policy announcements in the United States in the past weeks," said Koen De Leus, strategist at KBC Securities, in Brussels.
Europe's FTSEurofirst 300 gained 0.4% and Japan's Nikkei closed up 0.8%.
China's key stock index closed up 2.9% on relief that the central bank raised lenders' reserve requirements last week instead of benchmark interest rates to curb inflation.
The market had been worried about a rise in interest rates, thus the increase in bank reserve requirement ratios (RRR) late on Friday was greeted with more active buying.
