381-point Dow surge disappears as bond jitters return

Global bond markets sell-off triggered by central bank policy worries

While Wall Street has been calling for a correction for some time, given the market's euphoric rise, the fall has been more violent and quicker than anticipated.

The broader index S&P 500 declined by 0.79% to 2,740.44 points.

The Dow finished with a decline of 1,033 points, the second-worst in history, eclipsed only by Monday's 1,175-point plunge.

The CBoe Volatility index.VIX closed at its highest since August 2015.

"What is says, in general, is that higher interest rates make stocks look more expensive, especially relative to a fixed-income alternative", said Tim Ghriskey, managing director at Solaris Asset Management.

"Today it feels like leadership is going back to the rate market and now stocks are reacting to it", said John Briggs, head of strategy at NatWest Markets.

Fears about the bond market, inflation and interest rates seized investors again Thursday and drove the Dow, the S&P 500 and the Nasdaq all into the red for the year. The full 2017 reading was 2.3 percent, just marginally higher than past years that have averaged 2 percent.

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USA 10-year Treasury yields rose to fresh four-year highs on Monday at around 2.89 percent, setting the tone for European bond markets.

Bond prices have weakened in the past week-and-a-half as investors adjusted for the likelihood of a stronger US economy and higher inflation, which could lead the Federal Reserve to boost interest rates more times than previously anticipated. Many equity markets were already in negative territory last week owing to rising bond yields and profit-taking.

All that is keeping equities on tenterhooks.

The pan-European FTSEurofirst 300 index lost 1.74 percent and MSCI's gauge of stocks across the globe shed 1.98 percent.

The double-digit percentage stock decline has occurred even though Wall Street stresses that the health of the economy, labor market and USA businesses remain strong.

"The normal crisis relationship between equities and bonds was restored yesterday", Deutsche Bank strategist Jim Reid said in a note.

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At prevailing bond yield of 7.56 per cent, one would then require 13.56 per cent (adding 6 per cent risk premium) on equity to make a switch from bonds. As of Monday morning, the BSE Sensex is off almost 1,700 points from its all-time high of 36,443, while midcap stocks were bleeding even more.

Volumes on US exchanges meanwhile exceeded 9 billion shares for a fourth straight day on Wednesday, a figure surpassed just once before in the past seven months, according to Deutsche Bank.

The T-Bond channel I'm watching closely has a strong resistance around 3 percent yields - which was the previous high in December 2013 - and we are getting close, at 2.73 percent on Monday, Jan. 29.

The market performance also reflects the strong US and global economies, which have boosted corporate profits. "The mystery now is what level on the 10-year Treasury will, if not break the bull market's back, at least knock it back a few steps".

European bond yields also rose, lifted by the prospect of increased fiscal spending after Wednesday's coalition government deal in Germany. S. Treasury yields climbed after the Bank of England said interest rates probably need to rise sooner, adding to expectations of reduced central bank monetary stimulus around the world.

"There is a lot of concern in the rising yield in the 10-year Treasury note", said David Kass, professor of finance at the University of Maryland. Sterling rose around one percent against the dollar and euro.

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