By Caroline Valetkevitch
NEW YORK (Reuters) - Stocks in world markets remained on shaky ground on Thursday, with major U.S. stock indexes falling more than 1 percent, as U.S. bond yields crept back towards four-year highs.
Yields climbed after the Bank of England said interest rates probably need to rise sooner, adding to expectations of reduced central bank monetary stimulus globally.
Treasury bond prices have weakened in the past week-and-a-half as investors adjusted for the likelihood of a stronger U.S. economy and higher inflation, which could lead the Federal Reserve to boost rates more times than previously anticipated.
Also underpinning yields, U.S. congressional leaders Wednesday reached a two-year budget deal to raise government spending by almost $300 billion.
While the deal was a rare display of bipartisanship that should stave off a government shutdown, it looks set to widen the U.S. federal deficit further and could fan inflation.
The move in yields kept equity investors nervous about higher rates and inflation.
"There are two things on the table that are really driving the concerns. It's rising yields and inflation worries," said Chuck Carlson, chief executive officer at Horizon Investment Services, in Hammond Indiana.
"Inflation can really crimp multiples and that's something that greatly affects stocks, and then interest rates, price in the attractiveness of alternatives and that can affect it."
BOND YIELDS UP
The Dow Jones Industrial Average fell 414.75 points, or 1.67 percent, to 24,478.6, the S&P 500 lost 35.22 points, or 1.31 percent, to 2,646.44 and the Nasdaq Composite dropped 109.53 points, or 1.55 percent, to 6,942.45.
The pan-European FTSEurofirst 300 index lost 1.89 percent and MSCI's gauge of stocks across the globe shed 1.26 percent.
Emerging market stocks lost 0.89 percent.
The recent selloff, sparked by last Friday's jump in Treasury yields, sent the VIX index, Wall Street's "fear gauge," sharply higher. The index was just below 30 on Thursday, more than twice the levels seen in the past few months.
An improving outlook internationally is adding to pressure on global fixed income markets. The Bank of England raised its growth forecasts for Britain due to the strong global recovery.
"We've got yet another confirmation that a major central bank is wringing its hands over the possibility that economic growth is accelerating beyond current capacity," said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee.
Benchmark 10-year notes last fell 4/32 in price to yield 2.8457 percent, from 2.832 percent late on Wednesday.
European bond yields also rose, lifted by the prospect of increased fiscal spending after Wednesday's coalition government deal in Germany.
Oil prices were down after data showed U.S. crude output had reached record highs and the North Sea's largest crude pipeline reopened following an outage.
U.S. crude fell 1.72 percent to $60.73 per barrel and Brent was last at $64.56, down 1.45 percent on the day.
(Additional reporting by Hideyuki Sano in Tokyo and Sujata Rao in London; Editing by Bernadette Baum)
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