(Refiles to correct typo in first paragraph
* Treasuries yields soar as Moody's warns of US ratings
* Wall St closes down on rising funding concerns
* U.S. dollar gains against euro, weakens against sterling
By Walter Brandimarte
NEW YORK, May 27 (Reuters) - A spike in U.S. Treasury
yields triggered a selloff in equity markets on Wednesday, as
investors feared rising funding costs might delay a potential
recovery in the world's largest economy.
World stocks initially rose as signs of economic recovery
were reported from Japan to the United States, encouraging
investors to move out of lower-yielding assets such as U.S.
Treasuries.
But Wall Street later soured as the Treasury sell-off
accelerated despite a well-received auction of new five-year
notes. Compounding investor fears was a warning by Moody's that
U.S. credit ratings could come under pressure if the government
fails to reduce debt levels once economic growth returns,
though Moody's affirmed the U.S.'s AAA rating for now.
The three main U.S. stock indexes turned negative early
afternoon as Treasuries maturing from 10 and 30 years lost over
a full point in price, sending yields to six- and nine-month
highs, respectively.
"The two-year auction was great, the five-year was OK, but
we won't know if things are OK or not until we get the 10-year,
as the further you go out in duration, the more critical it is
that the U.S. can get funding," said Steven Butler, head of
currency trading at Scotia Capital in Toronto.
The benchmark 10-year U.S. Treasury note <US10YT=RR> lost
44/32, with the yield at 3.7147 percent. The 2-year U.S.
Treasury note <US2YT=RR> declined 1/32, with the yield at
0.9661 percent. The 30-year U.S. Treasury bond <US30YT=RR>
slipped 66/32, with the yield at 4.6258 percent.
Spreads between 10- and two-year note yields gapped to 275
basis points, resulting in the steepest U.S. Treasury yield
curve on record as rising U.S. deficits drove investors to
request higher compensation for holding longer-dated
instruments.
Wall Street led losses on global equity markets. The Dow
Jones industrial average <> closed 2.05 percent lower,
while the Standard & Poor's 500 Index <.SPX> lost 1.90 percent,
and the Nasdaq Composite Index <> finished 1.11 percent
lower.
The MSCI world equity index <.MIWD00000PUS> fell 0.55
percent while the MSCI index for emerging-market stocks
<.MSCIEF> trimmed early gains to rise 1.7 percent, both
partially supported by early gains in Asian and European
markets.
European equities finished higher for a third straight
session after France, Europe's second-largest economy, posted a
small rise in consumer confidence for May. In Sweden, consumer
confidence also beat estimates.
The FTSEurofirst 300 <> of top European shares ended
0.6 percent higher, booking gains in eight of the past 10
sessions.
DOLLAR MIXED
The U.S. dollar weakened against the British pound <GBP=>,
propelled by hopes of improvement in the UK economy and banking
sector, but firmed against the euro after a European Central
Bank official said interest rates could fall further if
economic conditions worsen.
Sterling traded above $1.60 for the first time in almost
seven months. The euro <EUR=> weakened 0.71 percent at $1.389.
Against the Japanese yen, the dollar <JPY=> was up 0.17 percent
at 95.16.
The euro has climbed more than 5.0 percent against the
dollar so far in May, lifted partly as cautious optimism about
the world economy dulled the U.S. dollar's safe-haven appeal.
But that view was shaken a bit as U.S. housing data on
Wednesday showed the inventory of unsold homes rose last month,
stoking worries that prices have further to fall.
The data also showed, however, that U.S. existing home
sales climbed in April to an annual rate of 4.68 million from a
4.55 million pace in March, slightly higher than market
expectations for a 4.66 million-unit pace.
In commodity markets, U.S. crude oil futures settled at the
highest level in almost seven months on expectations that OPEC
would not alter production levels when it meets on Thursday.
U.S. oil futures for July <CLN9> settled up $1, or 1.6
percent, at $63.45 a barrel, the highest close since $65.30 on
Nov. 5.
(Additional reporting by Pedro Nicolaci da Costa, Steven C.
Johnson and Vivianne Rodrigues)
