US congressional leaders reached a two-year budget deal to raise government spending by almost $300 billion, a rare display of bipartisanship that is positive for risk sentiment but is also widening the federal deficit sharply.
"The scale of increase was much larger than what markets were expecting just a few months ago. It will have as big impacts as tax cuts. Since the markets haven't priced this in yet, US bonds could be sold for another week or so," said Tomoaki Shishido, fixed income analyst at Nomura Securities.
The 10-year US Treasuries yield jumped back to 2.813 per cent, near Monday's four-year peak of 2.885 per cent.
That is keeping investors nervous, with the prospects of rising interest rates around the world triggering a massive selloff in equities in the past few days. The rising costs of dollar funding is detrimental to firms not just in the United States but around the world.
MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.1 per cent in early Thursday trade, staying near its six-week low touched on Tuesday.
Japan's Nikkei gained 0.6 per cent, though it was still down more than six percent so far this week.
MSCI's broadest gauge of the world's stock markets has lost ground in seven of the last eight sessions until Wednesday, a period in which it slumped 6.8 per cent.
US stocks ran out of steam on Wednesday after an early surge, with the S&P 500 ending down 0.50 per cent and the Nasdaq Composite losing 0.9 per cent.
The Cboe Volatility Index, known as the VIX and often seen as investors' fear gauge, fell 2.3 points to 27.73, but that was still more than twice the levels generally seen in the past few months.
The dollar gained after the debt ceiling deal in Washington, rising against a broad range of currencies.
The dollar index rose to a two-week high of 90.403 on Wednesday and last stood at 90.291.
Southern European government bond yields tumbled on Wednesday, after Germany's pro-European, pro-spending Social Democratic party took the finance ministry in a coalition government.
The dollar stood at 109.41 yen, recovering from Wednesday's low of 108.92.
The New Zealand dollar fell to four-week lows after New Zealand's central bank lowered its forecasts for inflation right out to 2020 while saying volatility in equity markets this week was a warning sign that global markets are nervous about the risk of higher inflation and rising interest rates.
The kiwi fetched $0.7230 after having slumped to $0.7209, a low last seen on January 11.
Precious metals also dipped, with gold hitting a four-week low of $1,311.6.
One outlier was the Chinese yuan, which continued to strengthen, with the Thomson Reuters/HKEX Global CNY index hitting a two-year high, having risen 1.7 per cent already during the first week of February.
Oil prices fell after US data showed a build in inventories and record high crude production, raising worries of more selling.
Brent crude futures tumbled to a six-week low of $65.16 $ per barrel.
US crude futures hit one-month low of $61.25 per barrel and last traded at $61.65.
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