By Caroline Valetkevitch
NEW YORK (Reuters) - World stock markets rose on Tuesday as technology shares recovered from a recent sell-off while short-dated U.S. bond yields briefly hit multi-week highs ahead of an anticipated interest rate increase from the Federal Reserve.
The S&P 500, Dow industrials and Russell 2000 set record closing highs. The S&P technology index <.SPLRCT> ended up 0.9 percent after a two-session selloff that put the spotlight on areas of the stock market where valuations appear stretched.
The U.S. central bank is widely expected to raise its benchmark interest rate on Wednesday and may also provide details on its plans to shrink $4.5 trillion of assets it amassed to nurse the economic recovery.
Analysts say the Fed could take an aggressively hawkish posture of signalling a balance sheet reduction this year and another rate increase in December.
Short-dated U.S. Treasury yields briefly hit multi-week highs but the market was barely changed after a strong 30-year debt auction ahead of Wednesday's Fed decision. Short-dated Treasuries in particular are considered most vulnerable to Fed rate increases.
U.S. three-year Treasury > yields hit 1.511 percent, their highest since May 16, while two-year yields > touched their highest in a month at 1.367 percent.
Yields eased from session highs to be roughly unchanged from levels as of late Monday, with three- and two-year yields last at 1.503 percent and 1.363 percent, respectively.
"The markets have to build in a little bit of risk that the Fed may say something about tapering tomorrow," said John Herrmann, director of interest rates strategy at MUFG Securities in New York.
In the equity market, big technology names like Microsoft
The Dow Jones Industrial Average <.DJI> was up 92.8 points, or 0.44 percent, to close at 21,328.47, the S&P 500 <.SPX> gained 10.96 points, or 0.45 percent, to 2,440.35 and the Nasdaq Composite <.IXIC> added 44.90 points, or 0.73 percent, to 6,220.37.
The pan-European STOXX 600 <.STOXX> ended up 0.6 percent, while MSCI's gauge of stocks across the globe <.MIWD00000PUS> was up 0.5 percent.
The U.S. dollar fell to its lowest against the Canadian dollar > since late February after hawkish comments from Bank of Canada Governor Stephen Poloz.
Poloz said the central bank's 2015 rate cuts "have largely done their work," signalling that it could raise rates sooner than previously thought.
The U.S. dollar index <.DXY> was down 0.1 percent.
Besides the Fed, the Bank of Japan and the Bank of England also meet this week, although no major policy changes are expected.
The gap between benchmark U.S and European bond yields held near its widest in a month as the Fed meeting also shone a light on the slow pace of change in European Central Bank policy.
Oil prices edged higher after OPEC detailed supply cuts around the world.
Brent crude futures
(Additional reporting by Sam Forgione and David Gaffen in New York, John Geddie in London and Nichola Saminather in Singapore; Editing by Nick Zieminski and James Dalgleish)
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