Selling pressure on 10-year U.S. 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 U.S. deficits.
World shares climbed with gains in Japan and Europe, adding to an end-of-year rally.
The dollar rose against a basket of major currencies <.DXY>, lifted by prospects for higher returns on U.S. assets.
U.S. Treasury yields were up around 5 basis points to more than 3.37 percent, levels not seen for six months. They shot up as much as 20 basis points last Wednesday alone on a combination of expectations about an improving U.S. economic climate and worries about an increased fiscal deficit due to proposed extensions of tax cuts.
Investors have also begun reappraising the likelihood of further bond-buying by the U.S. Federal Reserve after the current $600 billion quantitative easing program is completed.
Monday's selling appeared to be spreading to short-term U.S. papers, suggesting investors are also 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 percent, said Tomoaki Shishido, a fixed-income analyst at Nomura Securities in Tokyo.
The two-year note was yielding 0.67 percent, up three basis points.
Wariness about holding low-yielding government debt also spread into Europe, where the 10-year Bund yield was up three basis points at 2.98 percent.
FX AND STOCKS
European bond trading is complicated by the euro zone debt crisis, which will be the main subject later in the week of an EU summit seeking some way of stabilizing pressure on the debt of peripheral economies.
The euro was again a victim of the concern, falling a quarter of a percent to just under $1.32. The single currency was also under pressure from expectations of higher yields, and thus returns, from U.S. assets.
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, signaling 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 0.1 percent for a more than 8 percent year-to-date gain <.MIWD00000PUS>.
Europe's FTSEurofirst 300 <.FTEU3> gained 0.2 percent and Japan's Nikkei <.N225> closed up 0.8 percent.
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.
(Additional reporting by Atul Prakash; Editing by John Stonestreet)