A weak auction of 20-year US government debt flashed a warning sign that the bond market was worried about the country's finances, days after Moody's lowered its top-tier credit rating.
The news brought an end to a healthy run-up in recent weeks that was stoked by the US-China tariff detente and signs of progress between the United States and other countries on trade.
Bond yields spiked across the board as investors demanded more interest for holding government debt, signalling their fears about the world's biggest economy -- 30-year Treasuries hit their highest level since late 2023.
The selling came after the auction of 20-year bonds attracted tepid interest and brought back memories of the sell-off that followed US President Trump's "Liberation Day" tariff blitz last month, which was followed by the White House taking a less aggressive approach.
All three main indexes on Wall Street ended sharply lower.
A tax bill pushed by Trump that is currently going through Congress pairs an extension of the tax cuts from his first presidential term with steep savings in government spending to pay for them.
But many market watchers do not expect the spending cuts in the package to be sufficient to offset the tax cuts, lifting the deficit.
"The proposed tax cuts are raising concerns from economists about the US's fiscal position and there are signs of anxiety in the bond markets about the country's debt burden," said National Australia Bank's Tapas Strickland.
Trump's first-term treasury secretary, Steven Mnuchin, warned that "the budget deficit is a larger concern to me than the trade deficit" and called for more spending cuts.
Asian and European equities also sank, with Tokyo, Hong Kong, Shanghai, Sydney, Seoul, Singapore, Taipei, Mumbai, Bangkok, Wellington and Manila all in the red.
London, Paris and Frankfurt also dropped in the morning as data showed eurozone business activity contracted in May.
The dollar also held losses against the yen on growing concerns about the US economy and as traders seek out the Japanese unit for its safe-haven status.
- Bond market strife -
Rania Gule, a senior market analyst at XS.com, said he expected to see the yen continue strengthening in the second quarter "unless there are major surprises in US monetary policy or unexpected economic developments".
He added that focus will now turn to US data, bonds, reactions to Trump's tax plan, and the Bank of Japan's next steps.
"Regardless, the yen's return to prominence not just as a haven, but as a fundamentally strong currency, has already begun -- and is likely to continue," he wrote.
The uncertainty also helped revive demand for gold, another safe asset, which was sitting around $3,340 an ounce.
And there are now fears that stocks could be in for another rough ride.
"It took a day or two longer than I thought but it's now in progress -- stocks are starting to wake up to the strife in bond markets," said Neil Wilson at Saxo.
"Trouble has been brewing in the bond market for weeks and now it's spread to the stock market. Worries about the US fiscal position and economy, with Donald Trump's... tax bill about to be signed that will raise debt and possibly inflation, as well as a weak 20-year auction, pushing bond yields higher.
"Stocks fell as investors realised this is not a drill - as heard on the floor earlier this week, they will break the equity market to save the bond market."
Still, bitcoin broke a fresh record of $111,878.25 as US lawmakers showed greater bipartisan support for a cryptocurrency bill on the regulation of so-called stablecoins, digital coins with value tied to the dollar.
This has sparked fresh hopes for regulatory clarity in the sector, including for bitcoin, which is not directly linked to the dollar.
Oil prices extended losses, giving up more than one percent, after data from the US Energy Information Administration showed the country's stockpiles had risen last week.
The news helped reverse a rally in the commodity on Wednesday that was sparked by a CNN report that Israel was planning a strike on Iranian nuclear sites.
Worries about the economic outlook and the impact on future demand added to the selling pressure.
- Key figures at around 0810 GMT -
Tokyo - Nikkei 225: DOWN 0.8 percent at 36,985.87 (close)
Hong Kong - Hang Seng Index: DOWN 1.2 percent at 23,544.31 (close)
Shanghai - Composite: DOWN 0.2 percent at 3,380.19 (close)
London - FTSE 100: DOWN 0.4 percent at 8,747.88
Euro/dollar: DOWN at $1.1314 from $1.1334 on Wednesday
Pound/dollar: DOWN at $1.3425 from $1.3421
Dollar/yen: DOWN at 143.06 yen from 143.66 yen
Euro/pound: DOWN at 84.28 pence from 84.42 pence
West Texas Intermediate: DOWN 1.7 percent at $60.54 per barrel
Brent North Sea Crude: DOWN 1.6 percent at $63.86 per barrel
New York - Dow: DOWN 1.9 percent at 41,860.44 (close)
dan/pbt
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