The Australian sharemarket has endured another pummelling as investors absorbed the shock of the world's biggest economy winding back its stimulus program, while fears of a Chinese credit crunch weighed on sentiment.
The fall - which saw a further $20 billion wiped off the market - coincided with an extraordinary sell-off in Australian government bonds, with 10-year bond yields hitting a 15-month high.
Meanwhile, Chinese equity markets also witnessed their biggest daily loss in four years after diving 5.3 per cent in Shanghai and 6.7 per cent in Shenzhen. This followed Goldman Sachs cutting its forecasts for China's economic growth amid growing concern over bad loans.
On Monday, the benchmark S&P/ASX 200 Index fell 69.7 points to 4669.1. This means the index is only 20.2 points higher than where it started the year. The broader All Ordinaries Index lost 72.7 points, or 1.5 per cent, to 4651.1.
Last week, the US Federal Reserve signalled a possible end to its stimulus program, which has involved a multimillion-dollar bond-buying program. This caused 10-year US government bonds to spike - rising 14 per cent last week. A sell-off of Australian government debt saw yields soaring sharply.
Late last year, Australian government 10-year bonds hit record lows, mostly as offshore investors rushed into safe-haven assets. Now, the 10-year yield spread between Australian and US bonds has widened to an almost-two-month-high of about 140 basis points.
"This market move is quite unique," US interest rate strategist Andrew Lilley said. "In the past 10 large sell-offs in bonds, inflation expectations were rising quite significantly because the economic outlook was getting better. This sell-off is unique because 10-year inflation expectations in the US in the past six weeks have fallen about 0.5 per cent."
The spread between three and 10-year bonds reached about 100 basis points - its highest in about four years.
At the same time, financial markets lowered their expectations for a July rate cut in Australia, pricing in an 18 per cent chance of an easing next month.
Mr Lilley said investors appeared to be fleeing back into cash as the value of all assets - including commodities and gold - were falling at the same time.
The Australian dollar also slumped on Monday, falling below US92¢ for the first time since September, 2010. It was buying US91.59¢ late Monday, down from about US95¢ last week.
Deutsche Bank's head of fixed income David Plank said the higher bond yields were leading to lower equity prices, leaving investors with "nowhere to hide".
Lower bond yields had been helping to underpin the strength of equities and other assets. Materials and energy were the worst hit, with the sector down 3 per cent.
Fears about the state of China's banking sector has led some strategists to fear the country is now facing a credit bubble similar in dynamic to the US subprime crisis.
"There is a credit bubble in China that is now blowing up and no one knows who is exposed to who," Credit Suisse strategist Damian Boey said.
"It will take some time to figure that out and, until we do, the markets will keep slowing."
Mr Boey said the key issue was whether authorities could protect the core of banking system against the bad loans of the unofficial banking system.
"The answer is probably yes, but even still, it could be painful. Chinese industrial production growth could well be zero or negative, and if that happens, then there is no demand for our commodities."