* U.S. stocks lower in early trading
* Benchmark Treasury yield highest since March
* Dollar suffers big drop after report China may halt bond buys (Updates with U.S. markets’ opening levels)
By Caroline Valetkevitch
NEW YORK, Jan 10 (Reuters) - Major government bond yields hit multi-month highs and world stock indexes fell on Wednesday following a report that Chinese officials have recommended slowing or halting purchases of U.S. government bonds.
The yield on 10-year U.S. Treasury hit a 10-month high, while the dollar slumped against a basket of currencies following the Bloomberg News report.
The Chinese officials, who were not named, said the market for U.S. government bonds is becoming less attractive relative to other assets, according to the report. They also cited trade tensions with the United States as a reason to slow Treasury purchases, the report said.
“It’s pretty significant. That takes an important buyer out of the market at the same time you’re taking the most important buyer out of the market - the U.S. Fed,” said Bruce Bittles, chief investment strategists at Robert W. Baird & Co in Sarasota, Florida.
“It’s upsetting the supply and demand balance if the report is true. Who’s going to replace the demand side?”
Benchmark 10-year notes last fell 10/32 in price to yield 2.5825 percent, from 2.546 percent late on Tuesday. It earlier rose to 2.597 percent, the highest since March 15.
China is the largest foreign holder of U.S. government debt, with $1.19 trillion in Treasuries as of October 2017, data from the Treasury Department show.
Germany’s 10-year bond yield hit its highest level since the October European Central Bank meeting when policymakers first announced the extension of its bond-buying scheme, with one trader citing heavy supply as the latest trigger for the move.
A combination of factors has pushed global bond yields higher in recent weeks, with global growth and higher oil prices leading investors to speculate that the world’s major central banks might withdraw from their stimulus program sooner rather than later.
Some investors saw a reduction of bond purchases by the Bank of Japan this week as a potential indication of this.
Analysts also said the rise in yields across the board is fuelling speculation as to whether this is the start of a sustained bear market for bonds.
The Dow Jones Industrial Average fell 52.2 points, or 0.21 percent, to 25,333.6, the S&P 500 lost 6.67 points, or 0.24 percent, to 2,744.62 and the Nasdaq Composite dropped 32.02 points, or 0.45 percent, to 7,131.56.
U.S. stocks have had a strong start to the year, with the S&P and the Nasdaq having closed at record highs on every single day in 2018, buoyed by optimism over global economic growth and expectations of a strong quarterly earnings.
The pan-European FTSEurofirst 300 index lost 0.46 percent and MSCI’s gauge of stocks across the globe shed 0.11 percent.
The dollar index had its biggest single-day drop against the Japanese yen in nearly eight months.
The dollar index fell 0.48 percent, with the euro up 0.48 percent to $1.1992.
The Japanese yen strengthened 1.15 percent versus the greenback at 111.40 per dollar.
Crude oil prices hit new multi-year highs as OPEC-led production cuts and healthy demand helped to balance the market.
U.S. crude rose 0.64 percent to $63.36 per barrel and Brent was last at $69.00, up 0.26 percent.
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Additional reporting by Ritvik Carvalho, Abhinav Ramnarayan, Tommy Wilkes, and Dhara Ranasinghe in LONDON, and Sinead Carew and Karen Brettell in New York; Editing by Gareth Jones and Nick Zieminski