By Sinéad Carew
NEW YORK (Reuters) - MSCI's global index of stocks kicked off fourth-quarter trading with a decline as U.S. Treasury yields and the dollar rose while investors worried that rates would stay higher for longer.
While a short-term spending deal averted a partial U.S. government shutdown, the news failed to raise much enthusiasm among investors as it provides funding for less than two months.
U.S. stocks were a mixed bag while earlier in Europe stocks closed down after September PMI data, a key economic indicator, showed manufacturing activity still in a downturn. But U.S. manufacturing took a step further toward recovery in September as production picked up and employment rebounded.
While U.S. Federal Reserve Vice Chair for Supervision Michael Barr said he feels the Fed's policy rate is "at or near" a sufficiently restrictive level to bring inflation down, he also said that rates will need to stay high for some time.
Meanwhile, Fed Chair Jerome Powell reiterated the central bank's emphasis on controlling inflation, saying price stability is needed to foster a sustained, strong labor market.
"The sell-off in bonds has been continuing. There's a combination of economic growth being higher-than-expected and the Fed having to keep rates higher for longer and general concern that the United states is not keeping its fiscal house in order," Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte.
The 11th-hour U.S. government funding bill will mean that key data releases including Friday's monthly payrolls report can go ahead on time. Delayed data could have intensified market uncertainties by keeping the Fed on the sidelines.
"The fact we averted a shutdown should be a positive but to be fair they only kicked the can down the road. The good news is only lukewarm good news," Zaccarelli said.
The Dow Jones Industrial Average fell 74.15 points, or 0.22%, to 33,433.35, the S&P 500 gained 0.34 points, or 0.01%, to 4,288.39 and the Nasdaq Composite added 88.45 points, or 0.67%, to 13,307.77.
The pan-European STOXX 600 index earlier closed down 1.03% while MSCI's gauge of stocks across the globe shed 0.51%.
In U.S. Treasuries, benchmark 10-year notes hit their highest yield since 2007 and were last up 12 basis points to 4.691%, from 4.571% late on Friday. The 30-year bond was last up 9.3 basis points to yield 4.8021%, from 4.709%. The 2-year note was last was up 7.1 basis points to yield 5.1166%, from 5.046%.
In currencies, the dollar climbed, building on four straight weeks of gains after the stop-gap funding bill was passed and after economic data that supported the view the U.S. Fed will have to keep rates higher for longer.