MILAN / SINGAPORE – The rally in stock markets stalled on Wednesday as a surge in US Treasury yields on optimism about a swift economic recovery put pressure on lofty company valuations.

Benchmark 10-year Treasury yields reached a one-year high to trade near pre-pandemic levels, as vaccine progress and encouraging economic data begin to drive investor focus on inflation.

The MSCI world equity benchmark fell 0.1 percent by 0908 GMT, as a weaker start of trading in Europe offset a brief surge in Asia overnight.

The index, which tracks shares in 49 countries, ended flat on Tuesday to snap 11 straight positive sessions.

S&P 500 and Nasdaq futures were both little changed. Ten-year Treasury yields , up nearly 40 basis points this year, rose as far as 1.3330 percent before easing to 1.2838 percent. percent

“Regarding the bond market sell-off, things are finally starting to get serious as real yields are on the rise, driven by bets … of central banks tightening sooner than previously expected,” said Arne Petimezas, analysts at AFS in Amsterdam. “Risk-assets are now becoming vulnerable to a pull-back.”

In the short term, however, investors expect central banks to keep monetary policy loose and minutes later on Wednesday from the U.S Federal Reserve’s January meeting are expected to reinforce that view.

“Recent remarks by (Fed Chair Jerome) Powell and several other Fed officials show that the FOMC is very comfortable with its current policy stance,” wrote UniCredit strategists.

The gap between 10-year and two-year US yields also reached its widest in nearly three years in anticipation of short-term rates going nowhere. 

Besides a cooling in stock-market exuberance, gold and the Japanese yen have been other casualties of rising rates.

Gold, which pays no income and was last down 0.5 percent on the day, tends to fall when yields rise, and it touched a two-week low on Wednesday.

The yen is sensitive to US rates because Japanese yields are anchored and higher US returns can attract investment flows out of yen and into dollars. It fell to a five-month low against the dollar and has lost 2.7 percent this year.

The euro fell 0.2 percent to US$1.2075. Sterling, which has been surging as vaccinations roll out rapidly across the United Kingdom, was last down 0.1 percent at US$1.3892. The dollar index rose 0.05 percent.