New York: US benchmark bond yields hit a two-year high near 3% on Monday and emerging market currencies from India to Indonesia tumbled as markets braced for the Federal Reserve to start withdrawing support for the US economy.

US stocks were mixed, with large-cap tech shares lifting the Nasdaq but interest-rate sensitive real estate stocks such as shopping mall owner and developer Macerich slipping.

Fear that the Fed will scale back stimulus spending next month battered Wall Street last week, with the Dow industrials putting in their worst weekly run of the year. Political uncertainty in Italy dragged down a broad European stock index.

Minutes from the Fed’s last policy meeting will be released on Wednesday and could shed light on when the central bank plans to slow its $85 billion-a-month in bond purchases, a prospect that has been making markets nervous for months.

The Fed has said it expects the economy to strengthen in the second half of this year and into 2014, and recent US data has suggested labour market improvement and rising price pressure.

That has pushed long-term interest rates up sharply over the last few months, with the US benchmark 10-year treasury yield hitting a two-year high of 2.90% on Monday, up more than a percentage point since May.

However, Fed policymakers have also said that any sign of weakness could delay the timetable for tapering bond purchases.

“What you are seeing at the moment in a way is central bankers versus the markets," said ABN Amro economist Nick Kounis. “The markets are pushing up the rate expectations and central bankers have been trying to pour cold water on the moves, but it is proving more difficult against a background of stronger economic data."

Rates on US 30-year fixed-rate mortgages have followed treasury yields higher, which could threaten a housing market recovery. That weighed on shares of real estate investment trusts such as Macerich, which fell 1% on Monday. The PLHX Housing Sector Index lost 1.7%.

“Housing’s been a bright spot and it’s already been dulled a bit because refinancing activity has slowed," said John Canavan, a market strategist at Stone & McCarthy Research Associates.

But he said rates are still at “very low levels" and would need to go much higher to cause serious trouble for housing.

Capital-intensive industries such as miners and utilities, however, could struggle in a higher interest rate environment.

“Anybody with a large amount of short-term debt," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group. “And if they pay a dividend, it can be at risk."

The Dow Jones industrial average was down 43.39 points, or 0.29%, at 15,038.08. The Standard & Poor’s 500 Index was down 5.36 points, or 0.32%, at 1,650.47. The Nasdaq Composite Index was up 6.55 points, or 0.18%, at 3,609.33.

German 10-year government bond yields rose 1.3 basis points to 1.89%, having earlier hit their highest since March 2012 at 1.92%.

Emerging Turbulence

European shares have held up better in recent weeks. The 17-country euro zone ended an 18-month recession last quarter, growing 0.3%, and August business surveys this week are likely to show the modest recovery is slowly broadening out.

But a sharp slide in Italian stocks on Monday weighed on the FTSEurofirst 300, which shed 0.6%. Uncertainty about the strength of Italy’s coalition government hurt shares.

An index of global stocks fell 0.4%.

Rising interest rates are also hurting emerging markets that have benefited from large cash inflows courtesy of the Fed’s and other central banks’ loose monetary policies.

The Indian rupee slid to a record low of 63.30 per dollar, while the BSE Sensex fell 1.4%.

“With the turnaround of developed markets, foreign institutional investors have greater investment opportunities in Western Europe and North America," said Sourindra Banerjee, a professor at Warwick Business School in Britain. “This situation is aggravated with the tapering of quantitative easing."

The Reserve Bank of India (RBI) has tried to restrict how much money Indian residents and companies can send offshore, but that only raised fears of outright capital controls that would further undermine the confidence of foreign investors.

Indonesia’s rupiah fell to a four-year low of 10,485 per dollar and the strain also showed in MSCI’s broadest index of Asia-Pacific shares excluding Japan, which fell 0.5%.

Data later in the week will be an early reading on Chinese manufacturing from HSBC. Recent data suggested the economy is stabilizing, which should cheer Asian investors.

Eventually higher US yields should make the dollar more attractive, though it has struggled of late on fear that Fed tapering could drive investors out of US fixed-income markets.

The dollar was down about 0.1% at $1.3345 per euro, little moved from Friday. Against the yen it rose 0.4% to 97.95.

“We think over time the dollar will begin to outperform against the major currencies, but at the moment it is being offset by higher yields in Europe, where markets have been very much focused on the improving cyclical momentum," said Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi.

US crude oil prices fell 57 cents to $106.89 a barrel despite oil markets’ focus on the violent unrest in Egypt, which has stoked fears for exports from oil producers in the Middle East and North Africa.

Copper slid 1% to $7,330 a ton after hitting a 10-week peak of $7,420 on Friday, while gold fell 0.9% to $1,375.79. Reuters

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