By Caroline Valetkevitch
NEW YORK (Reuters) - Oil prices surged to their highest level since mid-2015 on Monday after the world's top crude producers agreed to the first joint output cut since 2001, sparking concerns about inflation which pushed up U.S. Treasury yields to a more than two-year peak.
Yields also gained ahead of a two-day policy meeting of the Federal Reserve that starts on Tuesday, which is expected to raise interest rates for the only the second time since the global financial crisis.
Following the weekend agreement between OPEC and key non-OPEC states that set the markets alive, Brent crude futures (LCOc1) were up $1.97 at $56.30 per barrel, having hit a session peak of $57.89, the highest since July 2015. U.S. crude futures (CLc1) were up $1.97 at $53.47 a barrel.
"The original OPEC deal pointed to a fairly lumpy 3 percent cut (in production), so this suggests there is a bit more upside for oil prices," said Neil Williams, chief economist at fund manager Hermes.
There was particular surprise as Saudi Arabia, the world's number one producer, said it may cut its output even more than it had first suggested at an Organization of Petroleum Exporting Countries meeting just over a week ago.
Energy shares jumped, helping to lift the Dow Jones industrial average (DJI) and S&P 500 (SPX) to record intraday highs in early trading, extending their recent string of records.
"This market has gone up without taking a breather and will enter a cautious trading day as it awaits the Fed," said Peter Cardillo, chief market economist at First Standard Financial in New York.
Benchmark U.S. bond yields topped 2.5 percent (US10YT=RR) for the first time since October 2014, with analysts saying the OPEC agreement boosted reflation expectations.
"We have the Fed decision coming up on Wednesday, and people are unsure whether they should buy the dip here," said interest rate strategist Gennadiy Goldberg of TD Securities in New York.
In late morning trading, U.S. 10-year note prices (US10YT=RR) were down 8/32, while the yield rose to 2.493 percent from 2.464 percent late on Friday. Earlier Monday, the yield struck 2.528 percent, its highest since Sept. 29, 2014, according to Reuters data.
FED AHEAD
In the currency markets, the dollar fell against most major currencies on concerns the Fed could suggest in an upcoming policy statement that the greenback's gains had gone too far.
Also, a rally in oil prices boosted commodity-linked currencies.
The dollar index (DXY), which measures the greenback against a basket of six major currencies, was last down 0.45 percent at 101.130, easing from an earlier 1-1/2-week high of 101.780.
The dollar was last down 0.4 percent against the Canadian dollar at C$1.3122
Overnight, Chinese stocks suffered their biggest fall in six months as blue chips were knocked by fresh regulatory curbs to rein in insurers' aggressive stock investments and rising bond yields prompted profit-taking in equities.
The blue-chip CSI300 index <.CSI300> fell 2.4 percent, to 3,409.18 points, while the Shanghai Composite Index <.SSEC> lost 2.5 percent to 3,152.97 points.
China's insurance regulator, which recently warned it would curb "barbaric" acquisitions by insurers, said late on Friday it had suspended the insurance arm of China's Evergrande Group (HK:3333) from conducting stock market investment.
Concerns were also rumbling about U.S.-Sino relations after Donald Trump re-ignited controversy over Taiwan.