NEW YORK/LONDON: Benchmark U.S. Treasury yields jumped to two-year highs and equity markets tumbled on Tuesday, with the Nasdaq falling more than 2%, as traders braced for the Federal Reserve to tackle fast-rising inflation by tightening monetary policy.

The dollar hit a six-day high as Treasury yields surged, while inflation fears were bolstered as oil prices rose to their highest since 2014 on possible supply disruptions after attacks in the Gulf increased an already tight outlook.

The jump in Treasury yields slammed U.S. and European technology stocks, while a drop in Goldman Sachs' stock led declines among U.S. banks after it missed quarterly earnings as the Fed slowed its asset purchases in November.

Two-year Treasury yields, which track short-term interest rate expectations, rose above 1% for the first time since February 2020 as traders priced in a more hawkish Fed before the U.S. central bank's policy meeting next week.

The two-, three- and five-year part of the yield curve will bear the brunt of expected Fed policy, said Tom di Galoma, a managing director at Seaport Global Holdings in Greenwich, Connecticut.

"The front end of the market is still way underpriced for Fed tightenings. The two-year note could be 1.5% by March," he said.

The yield on two-year Treasuries rose 8.4 basis points to 1.051% and on 10-year Treasury notes they climbed 10.2 basis points to 1.874%, a yield last seen that high in early January 2020.

Yields have jumped since minutes from the Fed's December policy meeting showed it may raise rates sooner than expected and begin reducing its asset holdings to slow inflation and address a tight labor market.

Information technology was the biggest percentage declining sector on Wall Street, losing 2.48%, with interest rate-sensitive financials the second biggest, down 2.27%.

Tech stocks also weighed the most in Europe, falling 2.2%, as European shares fell to their lowest level in more than a week. The pan-European STOXX 600 index fell as much as 1.44% before paring some losses to close down 0.97%.

Securities will continue to revalue as the market anticipates rate hikes, said Michael O'Rourke, chief market strategist at JonesTrading in Stamford, Connecticut.

"We still have a bit of a ways to go to prepare for three rate hikes or four rate hikes. We haven't priced that in," he said.

On Wall Street, the Dow Jones Industrial Average slid 1.51%, the S&P 500 fell 1.84% and the Nasdaq Composite slipped 2.60% to close almost 10% below its record closing high on Nov. 19, which would confirm a correction.

MSCI's all-country world index closed down 1.57% as tech stocks dropped in Asia overnight despite China easing policy again.

Investors are increasingly pricing in as many as four Fed rate hikes this year, with the first seen coming in March, and one from the European Central Bank.

Big market declines often occur in years following outsized gains on Wall Street, with nine sell-offs starting in the first quarter that averaged 10.9% since World War Two, said Sam Stovall, chief investment strategist at CFRA Research.

However, "history is a great guide, but it's never gospel," he said.

Oil was the only positive sector on Wall Street as Brent crude prices hit $88 a barrel after Yemen's Houthi group attacked the United Arab Emirates, escalating hostilities between the Iran-aligned group and a Saudi Arabian-led coalition.

Brent crude futures rose $1.03 to settle at $87.51 a barrel. U.S. crude futures settled up $1.61 at $85.43 a barrel.

Gold prices fell. U.S. gold futures settled down 0.2% at $1,812.40 an ounce.

Japan's yen initially fell after the Bank of Japan said it would stick to its ultra-loose monetary policy, despite hopes the economy is finally kicking clear of deflation.

The yen was last down 0.01% at $114.5900. The dollar index, which tracks the greenback versus a basket of six currencies, rose 0.523% to 95.749 and the euro was last down 0.74%, at $1.1323.

Russia's rouble, highly volatile recently, firmed 1.18% to 76.9395 a dollar after reports the West was no longer considering cutting Russian banks off from the Swift global payments system and was instead eyeing sanctions on banks.

 - Reuters