Stocks slide as bond ylds surge to key level

LONDON, June 7 (Reuters) Concerns about rising interest rates and bond yields hit stocks again on Thursday, while the yen fell as investors sought better returns elsewhere and on concern about reports North Korea had fired missiles off its coast.

Benchmark 10-year U.S. Treasury yields stormed through psychologically significant 5 percent threshold and euro zone government bond yields also rose to fresh multi-year highs as global interest rate expectations rose, putting pressure on equities near their record peaks.

U.S. stock futures were pointing to a softer open on Wall Street as investors worried higher bond yields would slow economic growth and attract funds out of equity markets.

''Increased rate expectations globally have finally started to impact on equity markets and concerns are starting to build about the impact that rising bond yields will ultimately have on global growth,'' analysts at Fox-Pitt, Kelton said in a note.

New Zealand's central bank surprised markets by raising rates by 25 basis points to 8.0 percent on Thursday, a day after the European Central Bank increased its key rate to 4.0 percent, the highest in almost six years and hinted at further rises.

''Bond markets may continue to sell off from the comments from the ECB and the rate hike in New Zealand overnight,'' said Kenneth Broux, financial market economist at Lloyds TSB. ''It's pretty evident that we are looking at higher rates pretty much everywhere right now.'' Sterling eased and UK interest rate futures pared losses after the Bank of England left interest rates steady at 5.5 percent. While 53 of 58 economists polled by Reuters expected the BoE to hold rates, 51 expect a hike to 5.75 percent or higher by September.

CORRECTION OR CAPITULATION? Asian equity markets were mixed and European shares gave up early gains to trade lower for a fourth day running as the higher bond yields and rising interest rates diminished the appeal of stocks.

The FTSEurofirst 300 was down 0.8 percent at a three-week low of 1,574 points and was down close to 3 percent from Monday's 6-1/2 year high.

Analysts said that while higher borrowing costs would need to be watched, equities still represented a good investment option.

''We still feel fundamentally bullish on the outlook, none of our views have changed,'' said Philip Watson, head of investment analysis and advice at Citi Private Bank.

''For most developed markets, we still see very favourable conditions in terms of valuations, which are around long-term averages now; the yield differential -- the cost of equity versus the cost of debt -- still offers an attractive reason for a lot of (leveraged buyout) participation; and companies remain under-leveraged.

''I think it's healthy to have corrections of this type.'' Other risk assets held up well, with emerging market spreads tightening as U.S. Treasuries sold off.

Stocks in China ended up 3 percent after another volatile day's trade, as investors saw further signs that authorities did not want the plunge sparked by last week's hike in the share trading tax to continue.

Tokyo's Nikkei rose 0.1 percent, as did MSCI's index of stocks elsewhere in Asia.

HIGH YIELDERS FAVOURED Interest rate differentials were a familiar theme in currency markets.

The New Zealand dollar set a 22-year post-float peak after the central bank rate hike and the Australian dollar rose to a fresh 17-year high after strong jobs growth fuelled talk of further rate hikes there.

New Zealand and Australia have been popular investment options for Japanese retail investors seeking to better the meagre returns offered in local fixed assets.

On the other side of the trade, the yen slipped to trade at 121.43 per dollar and 163.6 per euro.

The dollar extended gains versus the yen and rose against the euro after South Korea's Yonhap news agency quoted a government official as saying that North Korea fired several short-range missiles off its west coast.

''I think North Korea is being seen as a catalyst (for dollar strength), but realistically, with 10-year yields in the U.S.

picking up above 5 percent, the yield spread is also giving the dollar some support,'' said Jeremy Stretch, strategist at Rabobank.

U.S. 10-year yields topped 5.04 percent, its highest since August, and their euro zone counterparts climbed above 4.52 percent, a new 4-1/2 year peak.

The entire U.S. yield curve is now at or above 5 percent.

Oil prices oscillated around a barrel, near a nine-month high, after a raid by Turkish troops into northern Iraq rekindled concerns about stability of supply from the Middle East.

Benchmark London Brent crude was down 15 cents at .87 a barrel.

Turkey denied a report on Wednesday it had launched a major incursion into northern Iraq to crush Kurdish rebels, but a military source said troops had conducted a limited raid across the mountainous border, rattling markets.

REUTERS PV VC1950