Update: US Equities Follow Europe Lower As Bond Jitters Weigh

The Dow Jones opened down 0.95% at 26,188 points on Tuesday while the S&P 500 fell 0.81% to 2,831 points, after the two indices posted their worst sessions of the year on Monday.

US markets followed Europe lower, with the FTSE 100 down 0.92% by late afternoon at 7,600 while the German Dax fell 0.74% and the French Cac 40 dropped 0.69%.

Equity markets had enjoyed their best start to the year since 1987 with the S&P 500 rising 5.9% to 2,853 points on the back of President Donald Trump's tax reform.

However, the recent sell-off in government bond markets has spilled-over into equities, as the Nikkei 225 and Hang Seng fell 1.4% to 23,292 points and 1.1% to 32,607 points respectively overnight.

Analysts fear US inflation could spike once again as the dollar remains weak, in turn leading the Federal Reserve to tighten policy quicker than expected which could affect bond yields further.

The market is predicting the Federal Reserve to hike rates three times this year, while the European Central Bank (ECB) is expected to end its bond-buying programme in September.

A shock to the market could come if the Bank of Japan scales quantitative-easing back later this year, according to the Financial Times.

The big short: Fund managers warn of 'risky' Treasuries trade despite rising rate environment

These factors caused 10-year Treasury yields to rise as high as 2.73% on Monday, their highest point since April 2014 and far wider than the 2.43% seen at the end of 2017. The bonds are currently trading at 2.71%.

Furthermore, two-year Treasury yields hit a peak of 2.16%, the highest since September 2008, while in Europe the five-year German bund yield reached positive territory for the first time since November 2015, before falling back to -0.01%.

Kevin Giddis, head of fixed income capital markets at Raymond James, told CNBC: ""We start the week with bonds under pressure again.

"While the pace of the rise in yield in the short end of the yield curve is not that surprising since the Fed's bias remains to tighten, what is more surprising is how quickly the yield on the 10-year note has shot up.

"It is almost as if the anticipation of inflation has been replaced with the certainty of it."

Bond veteran Bill Gross declared the beginning of the bond bear market through Twitter on 9 January when the 10-year Treasury yield hit 2.55%. This was its highest level in around ten months, and 15 basis points beyond Gross's 2.4% yield barrier, which would herald a bond bear market.

Peter Tchir of Academy Securities said: "The overnight move clearly sets the stage for 2.8% on the 10-year and starts to put 3% on the table," according to CNBC.

"This is a global bond sell-off, some part of which is linked to the realisation that the combination of the Fed and ECB is slowly shifting from quantitative easing to neutral in the near term and actual combined balance sheet reduction later this year."