U.S. yields slip as selloff pauses, dollar down

HONG KONG, (Reuters) - U.S. Treasury prices edged up  on Thursday as bargain hunters entered the fray after a  violent two-day surge in yields, pulling the dollar lower,  while Asian stocks rose on hopes added fiscal stimulus will  help the U.S. economy in the near term.

In stark contrast to the jobless U.S. recovery that the White House is trying to shore up with tax cuts, Australia’s  jobs growth in November was the biggest since January, blowing  past forecasts and lifting the Australian dollar and domestic  shares.

The financial world is becoming split between investors who are deeply concerned a proposal from U.S. President Barack  Obama to extend tax cuts will worsen a budget shortfall, and  investors who are relieved U.S. authorities are trying to use  fiscal and monetary medicine for the economy.

Both higher U.S. yields and higher growth are being seen as supportive for the dollar, for now.

“The stimulus measures agreed by the U.S. administration will likely lead to many analysts penciling in higher growth  forecasts over 2011 whilst reducing the prospects of QE3 from  taking place, all of which is dollar positive,” Mitul Kotecha,  global head of foreign exchange strategy with Credit Agricole  CIB in Hong Kong, said in a note.

 The lead 10-year U.S. Treasury future was up around 9/32 in early Asian trade after hitting the lowest since  June 25 overnight. Even after the Federal Reserve’s highly   anticipated plan to buy more bonds to push down interest rates  was hatched in early November, the bond market has  relentlessly sold mid to longer-maturity bonds. Since November, the difference between 10-year yields and 2-year yields has widened by nearly 40 basis points.

In the cash market, the benchmark 10-year yield was at 3.22 percent after climbing to 3.33 percent on  Wednesday, the highest since June.

The poor performance of sovereign bond markets in the fourth quarter made much worse this week has become a question  of allocation for many investors. Bob Doll, chief investment  strategist at BlackRock, told the Reuters 2011 Investment  Outlook Summit the deal in Washington to extend tax cuts will  probably accelerate the move of cash into equities and out of  fixed income.

 The U.S. dollar has benefited from the rapid pace of rising Treasury yields relative to other sovereign bonds. The  move lower in U.S. yields on Thursday pushed down the dollar  index, a gauge of performance against six other major  currencies, 0.33 percent .

 The Australian dollar rose 0.7 percent to $0.9863 after employment increased by a net 54,600 jobs last month,  surpassing expectations of a 19,000 gain.

 Interbank rate futures tumbled while Australian government bond futures fell, unlike other  sovereigns on the day.

 In stock markets, Japan’s Nikkei share average hit a seven-month high though short-term measures showed the market  was due for a pause, having risen 12 percent since November  compared with the 6 percent advance in the MSCI all-country  world index .

 “Thanks to both the yen’s weakness and Nikkei futures ending higher in Chicago, the Nikkei may see more buying, but  the market has been overbought,” said Yumi Nishimura, a senior  market analyst at Daiwa Securities Capital Markets.

 Foreign investors gobbled up Japanese stocks last week, with net buying reaching the highest since early April,  Finance Ministry data showed. Foreigners have been net buyers  for 5 straight weeks, bringing the total net buying to 730.6  billion yen over the period. Out of the last 10 weeks  foreigners were net buyers in nine weeks.

 The MSCI index of Asia Pacific stocks outside Japan rose 1.1 percent , with gains spread evenly across  all sectors.