By Wayne Cole and Alun John
SYDNEY/LONDON (Reuters) - U.S. benchmark 10-year yields hit their highest in over a decade on Monday, while shares slipped and the dollar firmed as investors prepared for a packed week of central bank meetings, with the chance of a super-sized hike in the United States.
Markets are fully priced for a rise in interest rates of 75 basis points from the Federal Reserve, with futures showing a 20% chance of a full percentage point increase.
They also indicate a real chance that rates could hit 4.5% as the Fed is forced to tip the economy into recession to subdue inflation.
Higher interest rates have caused government bonds to sell off, and the U.S. benchmark 10-year Treasury yield hit 3.508% soon after noon in London, its highest level since April 2011. The two-year yield climbed to a new 12-year high of 3.961%.
European government bond yields also rose. [GVD/EUR]
"Asset performance during this Fed tightening cycle is very different from the norm for other rate hike episodes," said David Chao, a global market strategist at Invesco "Usually, the Fed tightens when the economy is thriving and most assets do well. However, most assets have suffered this time, perhaps due to the surge in inflation and abrupt policy change."
Trading was thinned on Monday as British markets were closed for the state funeral of Queen Elizabeth.
Europe's STOXX index slid as much as 1% to its lowest level in over 10 weeks, dragged down by rate-sensitive tech stocks and French shares which were hurt by the collapse of a planned merger between two TV companies.
S&P 500 futures lost 0.9%, and Nasdaq futures fell 1%. Earlier in the day Asian stocks also lost ground.
Bitcoin, which also moves in line with investors' risk appetite, hit a three-month low of $18,271.
It is not just in the United States that interest rate rises are expected. Most of the central banks meeting this week - from Switzerland to South Africa - are expected to hike, with markets split on whether the Bank of England will move by 50 or 75 basis points.
China's central bank went its own way though, and cut a repo rate by 10 basis points to support its ailing economy. Chinese blue chips still finished 0.1% lower.
The other exception is the Bank of Japan, also due to meet this week and which has shown no sign of abandoning its uber-easy yield curve policy despite the drastic slide in the yen.
The dollar rose 0.43% to 143.56 yen on Monday, having backed away from the recent 24-year peak of 144.99 in the face of increasingly strident intervention warnings from Japanese policymakers.
The euro was 0.22% lower at $0.9993, and sterling slipped 0.34% to $1.1383 just off Friday's 37-year lows, with traders keeping an eye on new British finance minister Kwasi Kwarteng's emergency mini-budget, expected Friday.
The dollar index, which measures the currency against six counterparts, was 0.3% stronger at 109.97.
"We expect the USD to keep trending higher this week to a new cyclical high above 110.8pts because of the deteriorating outlook for the world economy," said CBA analysts in a note. The ascent of the dollar and yields has been a drag for gold, which was down 0.78% at $1,662 an ounce after hitting lows not seen since April 2020 last week. [GOL/]