US Treasury debt prices sank and world stocks reversed course and dipped on Thursday after minutes from the latest meeting of the Federal Reserve's policy committee showed rising concern about the Fed's policy of buying bonds to stimulate growth.
The Federal Open Market Committee's minutes also extended a rally in the US dollar, fueled earlier by concerns about more budget wrangling in Washington.
The December meeting minutes showed several of the central bank's officials were leaning toward slowing or stopping purchases well before the end of 2013. The program has been key to a rally that has catapulted the US benchmark S&P 500 index to near a 5-year high.
"This is somewhat earlier than what the markets would have thought," said Millan Mulraine, senior economist at TD Securities in New York.
"While the evolution in the data, particularly progress in the labor market, will ultimately determine the timing of the end point for purchases, it seems reasonable to assume that the Fed has penciled in some time in 2013 as a natural point to conclude the QE3 program."
Global equities retreated while the US dollar climbed to a near four-week high against a basket of currencies on concerns about another looming fight over spending and taxes in Washington.
The MSCI world equity index fell 0.3% after hitting an 18-month high on Wednesday.
The Dow Jones industrial average lost 31.33 points, or 0.23%, at 13,381.22. The Standard & Poor's 500 Index was down 4.02 points, or 0.27%, at 1,458.40. The Nasdaq Composite Index was down 13.59 points, or 0.44%, at 3,098.67.
A European equity benchmark ended up 0.45% after hitting its highest intraday level since March 2011, boosted by a belated reaction in Swiss stocks due to a holiday.
Safer bonds slide
While the Fed said it would keep buying bonds to boost the economy over coming months, the meeting's minutes underscored a growing reticence about more increases to the central bank's $2.9 trillion balance sheet.
"Several (officials) thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet," the minutes said.
Ten- and 30-year US government debt sold off sharply after the document was released. Prices for 10-year US debt were down 21/32 to yield 1.9077%, up from 1.84% late on Wednesday and the highest since May.
"I think the bottom line is that the policy is likely to be in place for a while, but the minutes seem to be raising some doubts about the commitment to the policy," said Julia Coronado, chief North America economist at BNP Paribas in New York.
"This is going to be an ongoing issue for the Fed," she added. "We're in uncharted waters."
March Bund futures prices dropped 0.6% to their lowest in nearly a month.
Data upbeat but budget talks loom
Data suggesting some momentum in the US economy as the year ended showed private-sector employers stepped up hiring in December, cutting losses in stocks and further supporting the greenback gains.
Data showing activity in China's services sector and at US factories expanded in December brightened the outlook for global growth, also capping losses in risky assets.
Dragging on sentiment, US President Barack Obama and congressional Republicans face two more months of tough talks on spending cuts and an increase in the nation's debt limit as the hard-fought deal to avert the "fiscal cliff" of automatic tax hikes and spending cuts covered only taxes and delayed decisions on expenditures until March 1.
"There's still some clouds over the horizon, with the fiscal issue of the government," said Jeff Meyerson, head of trading at Sunrise Securities in New York. "We don't know how they're going to pan out, but in all likelihood there's not going to be a calamity."
