Overnight figures showed another solid increase in U.S. consumer prices, while minutes from last month's Federal Reserve meeting showed policymakers' growing concern about inflation and a general agreement to start tapering asset purchases soon.
Traders responded by bringing forward rate-hike expectations but lowering the projected peak. Fed Funds futures pulled forward the first hike from late in 2022 to almost fully price a 25 basis point hike by September, but pricing also suggests rates hovering around just 1.5% in five years' time.
Gold had its best session in seven months.
In the bond market short-term Treasury yields rose while long-term yields fell, flattening the curve. Longer-term yields also fell in Asia on Thursday and the dollar, which rallied through September, pulled back sharply with the decline in longer Treasury yields and took a breather on Thursday.
"The market continued to pull forward the pricing of the first rate hike while also decreasing terminal rate pricing, which we believe is a reflection of the market pricing in a policy mistake," said analysts at TD Securities.
Overnight on Wall Street the S&P 500 rose 0.3% and in early Asia trade S&P 500 futures were also up 0.3%.
Wednesday's data showed U.S. consumer prices up 5.4% on a year-on-year basis last month and that increases in rent seemed to be picking up steam - which along with soaring energy costs raises the risk of persistent price pressure.
In a change from readouts of Fed meetings over the summer, policymakers were also no longer described as "generally" expecting inflation pressures to ease.
Policymakers talked about the timing and structure of reducing bond buying and the minutes said that if a decision to begin tapering takes place next month, the process could begin in either the middle of November or in mid-December.
Ahead on Thursday, markets are awaiting U.S. producer prices and jobless claims figures as well as appearances from Bank of England and Federal Reserve policymakers.
Elsewhere, Singapore's central bank unexpectedly tightened monetary policy, citing forecasts for higher inflation .
In China, producer prises rose at their fastest clip since the series began in 1996, data on Thursday showed.
In Australia, a drop in employment figures and remarks from a central bank official about laggardly wages haven't derailed a buildup of recent market bets on rate hikes beginning next year.
Swaps markets have priced in about 90 basis points of rate rises by the end of 2023 despite the Reserve Bank of Australia insisting any hikes before 2024 are unlikely.
Currency markets were fairly quiet on Thursday after the dollar's overnight drop - which was its steepest fall on the euro in five months.
The euro was steady at $1.1591 in Asia while sterling, the Australian dollar and the New Zealand dollar held onto Wednesday gains - as did the Chinese yuan.
The Singapore dollar touched a three-week high.
In commodities on Thursday oil futures steadied, hovering comfortably above $80 per barrel, with U.S. crude at $80.55 a barrel and Brent at $83.32.
Gold held overnight gains at $1,789 an ounce.
The 10-year Treasury yield sat at 1.5525% after falling three bps overnight and the two-year yield eased marginally to 0.356% after rising 1.8 bps overnight.
Bitcoin rose 1.5% to $58,550, its highest level since May.
(Reporting by Tom Westbrook; Editing by Edwina Gibbs) ((firstname.lastname@example.org; +65 6973 8284;))