Bond market storm eases a touch but bears still on prowl

World shares inched higher and Wall Street was tipped for a stronger open on Tuesday, as US Treasury yields steadied at multi-year highs following the worst selloff in years.

Monday's selloff confirmed a so-called bear market for the US S&P 500 equity index, which is down more than 20 per cent from its most recent closing high, on fears central banks may have to up the pace of policy-tightening to curb soaring inflation.

Those expectations took US 10-year borrowing costs, the benchmark interest rate for the global economy, as high as 3.44 per cent on Monday, a 2011 peak.

While yields slipped on Tuesday to around 3.3 per cent they remain 180 basis points (bps) higher than at end-2021.

With the Federal Reserve due to start a two-day meeting later on Tuesday, markets waited to see if it raises rates by 75 bps, instead of the 50 bps originally anticipated.

Several investment banks, including Goldman Sachs, now flag that possibility which is almost fully priced in for Wednesday and would be the biggest increase since 1994.

Traders have also upped bets on how high interest rates might rise, seeing them peaking around 4 per cent next year, versus the earlier 3 per cent expectation.

That repricing has pummelled assets which benefited from rock-bottom interest rates -- stocks, crypto, junk-rated bonds and emerging markets.

"Quite simply, when we see monetary tightening the order of what we are seeing globally, something is going to break," said Timothy Graf, head of EMEA macro strategy at State Street.

"Stock markets are reflecting the reality of the first-order effect of tighter financial conditions," Graf said, predicting that with US stock valuations still above COVID-time lows, there was more pain to come.

"I think there are other shoes to drop," he added.