* 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
(Adds quote from analyst, background)
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, inverting an usual market dynamic where falling
Treasury prices result in rising stocks, and vice-versa.
Selling by mortgage investors, who are often forced to sell
U.S. Treasuries to hedge their positions when yields surpass
key levels, further pressured prices.
The three main U.S. stock indexes turned negative early
afternoon as Treasuries maturing in 10 and 30 years lost over a
full point in price, sending yields to six- and nine-month
highs, respectively, despite a well-received auction of
five-year notes.
"Yields are rising to levels that are becoming very
worrisome for the economic outlook," said William Sullivan,
chief economist at JVB Financial Group in Boca Raton, Florida.
Steven Butler, head of currency trading at Scotia Capital
in Toronto, said that while the U.S. Treasury's auction of
two-year notes on Tuesday was "great," Wednesday's sale of
five-year Treasuries was "OK."
"But we won't know if things are OK or not until we get the
10-year (auction next month), as the further you go out in
duration, the more critical it is that the U.S. can get
funding," he said.
Meanwhile, Moody's Investors Service affirmed the Aaa
rating for the United States but warned the top credit could
come under pressure if the government fails to reduce debt
levels once economic growth returns.
The benchmark 10-year U.S. Treasury note <US10YT=RR> lost
1-12/32, 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 2-2/32, with the yield at 4.6258 percent.
Spreads between 10- and two-year note yields widened to 275
basis points, resulting in the steepest U.S. Treasury yield
curve on record, as concerns about 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; Editing by Diane Craft)
