German bond yields climbed on Tuesday on optimism that inflation may have bottomed in the euro zone, lifting demand for the euro, while volatility in global bond markets weighed on stock indexes.
U.S. 10-year Treasury yields hit six-month highs before steadying as some buyers came back to the market, helping the government sell $24 billion in new three-year notes.
U.S. stocks ended down slightly as the move in bond yields unsettled investors already concerned about an eventual Federal Reserve interest rate hike.
"In the short term, the market is a hostage to interest rates," said Jim Awad, managing director at Plimsoll Mark Capital. "To the extent you have an increase in interest rates that the Fed doesn't control, you're getting an unwanted tightening in the financial markets."
Oil prices jumped as dollar weakness trumped concerns about oversupply.
German Bund yields have surged in recent weeks, boosted by optimism that inflation may have bottomed in the euro region, according to some analysts. The move has been exacerbated by investors unwilling to enter the market until the sell-off shows signs of stabilizing.
Benchmark 10-year Treasuries US10YT=RR were last up 5/32 in price to yield 2.25 percent, after earlier hitting 2.37 percent.
The stronger tone helped the Treasury auction three-year notes to strong demand at a 1.00 percent yield. Wednesday's $24 billion 10-year note sale and Thursday's $16 billion 30-year bond sale may be more challenging.
German 10-year Bund yields DE10YT=TWEB hit a session high of 0.74 percent on Tuesday.
Less than a month ago, German 10-year yields hit a record low of 0.05 percent, driven down by a 1-trillion-euro European Central Bank bond-purchase scheme intended to boost inflation.
MSCI's all-country world index .MIWD00000PUS of stock performance in 46 countries was down 0.3 percent.
The Dow Jones industrial average .DJI fell 36.94 points, or 0.2 percent, to 18,068.23, the S&P 500 .SPX lost 6.21 points, or 0.29 percent, to 2,099.12 and the Nasdaq Composite.IXIC dropped 17.38 points, or 0.35 percent, to 4,976.19.
Elevated U.S. yields mean higher corporate borrowing costs, which could hit shares across the world.
In corporate takeover news, AOL (AOL.N) shares jumped after Verizon Communications (VZ.N) said it would buy the company in a $4.4 billion deal.
The U.S. dollar slumped against the euro for the first time in four trading sessions following the spike in German Bund yields. The euro was last up 0.54 percent against the dollar at $1.12155 EUR=EBS.
GREEK CONCERNS
Investor concerns that debt-burdened Greece could run out of cash also weighed on stocks.
Greek officials told Reuters they had emptied an International Monetary Fund holding account to repay 750 million euros to the global lender on Monday, avoiding default but underscoring the dire state of the country's finances.
In the energy market, Brent crude LCOc1 rose $1.95 to settle at $66.86 a barrel. U.S. crude CLc1 jumped $1.50 to settle at $60.75.
Gold rose as the dollar declined. Spot gold XAU= touched a session high of $1,196.60 an ounce and was up 0.8 percent at $1,193.35.
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