Expectations of higher global interest rates pushed U.S. government bond yields to five-year highs on Wednesday, lifting the dollar to a 4-1/2 year peak against the yen but weighing on stocks.

Yields on benchmark 10-year Treasury notes spiked to 5.33 percent in European trade, their highest since 2002 and above the fed funds rate target of 5.25 percent.

Euro zone Bunds fared even worse, rising nine basis points on the day to a five-year high of 4.7 percent.

Bond yields have risen sharply in recent weeks as central banks tightened monetary policy and after stronger U.S. data killed off expectations of rate cuts from the Federal Reserve.

We've been through a three- or four-year period where yield curves have been a weird shape, said Tim Bond, head of asset allocation at Barclays Capital. I think you've got further to go, yield curves are just normalizing.

Higher bond yields should not impact too heavily on equities, which would remain cheap even if yields rose another 100 basis points, but would hit credit markets, Bond said.

To me credit spreads are the shoe that hasn't dropped yet. I think it's immensely bearish for credit markets.

The spread of Europe's iTraxx Crossover index of 50 mainly junk-rated companies widened to around 212 basis points over Treasuries, up from 190 a couple of weeks ago.

GREENBACK STRONG

The dollar rose strongly as the higher U.S. bond yields lured investors from other currencies.

Now people are focusing on home-grown issues in the U.S., including the mispricing of the Fed cycle -- rate cut (bets) are now fully taken out and markets are focusing on tightening next year, said Chris Turner, head of FX strategy at ING.

The market is fixated on U.S. bond yields. Looking at upcoming data, risk seems to be on the upside on yields.

Investors are awaiting a barrage of U.S. data including retail sales for May, business inventories for April and the Fed's beige book summary of economic conditions in the country.

The dollar rose 0.7 percent to 122.45 yen, levels not seen since late 2002.

Carry trade investors have borrowed the low yielding Japanese and Swiss units to pick up easy returns by investing in high yielding currencies like the New Zealand and Australian dollars.

The Swiss franc fell to a four month low of 1.2453 per dollar ahead of an expected hike in interest rates from the Swiss National Bank on Thursday.

The euro was up 0.4 at 162.45 yen but fell as low as $1.3264 to the dollar, its weakest since late March.

STOCKS SLIDE

Equities struggled as higher yields diminished their valuation appeal versus bonds, with MSCI's All-Country World Index down 0.4 percent.

Interest rate-sensitive financial and property stocks were among the worst hit in Europe and Asia as traders worried about rising bond yields crimping margins.

Europe's FTSEurofirst 300 shed 0.3 percent to 1,570 points, down almost 4 percent from a 6-1/2 peak last week.

Everyone knew that bond yields had to go up, said Andrew Lynch, a European fund manager at Schroders.

Its important to think why they are going up. Economic growth remains strong and companies are starting to be able to put end-market consumer prices.

U.S. stock futures were pointing to a softer start on Wall Street ahead of the flurry of economic data.

In Asia, the Nikkei fell 0.2 percent and MSCI's index of stocks elsewhere in Asia fell 0.8 percent, but Shanghai stocks jumped 2.6 percent in heavy trade.

Commodities also struggled on fears of slowing demand.

Copper fell more than 1 percent after supplies of the metal in London warehouses fell less than some had expected.

The strong dollar pushed gold to near a three-month low around $646 an ounce, while benchmark London Brent crude hovered below $69 a barrel ahead of weekly U.S. inventories data expected to show a rise in gasoline supplies.

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