US bond yields surged to their highest level this year, with the benchmark 10-year Treasury note hitting 4 per cent at one stage after a government bond auction sparked fears that the cost of financing record levels of US debt could threaten the economic recovery.

The Treasury was forced to offer attractive yields of up to 3.99 per cent on the $19bn auction of 10-year bonds to lure investors, a much higher level than expected by markets.