* U.S. bond yields climb on fiscal policy worries
* Dollar rises on hopes tax cuts will boost U.S. GDP
* Europe's benchmark stocks index at 26-month high
* Gold falls day after record peak, oil slips
(Recasts to focus on U.S. bond yields, updates with Europe's
close)
By Manuela Badawy
NEW YORK, Dec 8 (Reuters) - U.S. Treasury bond prices sank
for the second day on Wednesday, driving yields to a six-month
high after an agreement to extend tax cuts fed fears of
inflation and a ballooning deficit, while the dollar rose on
perceptions the tax cuts could increase economic growth.
Gold tumbled a day after hitting a lifetime high, setting
the stage for its biggest one-day drop in a month, in a burst
of profit-taking spurred partly by the stronger dollar.
On Wall Street, investors retreated from stocks, with the
major U.S. indexes little changed, in reaction to the dollar's
strength and the spike in bond yields.
In Europe, stocks closed at a 26-month high, lifted by
banking and insurance shares, on expectations that worries
about the euro-zone debt crisis will ease.
U.S. oil futures prices slipped, but remained near
two-year highs above $88 a barrel after government data showed
an increase in gasoline inventories.
The deal to extend tax cuts enacted during George W.
Bush's presidency stoked worries over how the government would
pay for the additional stimulus.
For the first time in weeks, investors shifted their
attention from concerns about euro-zone debt to U.S. economic
fundamentals in a light volume market.
U.S. Treasury prices have fallen by 2 percent in two days
after President Barack Obama proposed extending tax cuts aimed
at supporting economic growth. The dollar has reacted
positively, climbing as investors favor rising rates in the
U.S. compared with other bond markets.
"This tax agreement is a disaster for the U.S. fiscal
situation," said Howard Simons, strategist at Bianco Research
in Chicago.
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For graphic of recent Treasuries moves, see
http://r.reuters.com/ruj29q
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U.S. stocks opened slightly higher, but a rise in bond
yields and the dollar limited gains.
At midday in New York, the Dow Jones industrial average
<> was down 2.50 points, or 0.02 percent, at 11,356.66.
But the Standard & Poor's 500 Index <.SPX> was up 1.56 points,
or 0.13 percent, at 1,225.31. And the Nasdaq Composite Index
<> was up 5.83 points, or 0.22 percent, at 2,604.33.
The pan-European FTSEurofirst 300 <> index of top
shares rose to a fresh 26-month closing high at 1,119.51
points, up 0.35 percent, as financial stocks in Europe
advanced.
Global stocks measured by the MSCI All-Country World Index
<.MIWD00000PUS> fell 0.36 percent.
FOR BONDS, SELL-OFF CONTINUES
The sell-off of U.S. Treasuries continued for a second
straight day, which raised worries about demand at a $21
billion sale of 10-year notes later this session and a $13
billion reopening of a 30-year bond issue on Thursday.
Bonds, however, pared some of their losses after the
10-year note auction met with decent demand for a reopening.
The benchmark 10-year U.S. Treasury note <US10YT=RR> was
down 1-3/32, with the yield at 3.267 percent. The 2-year U.S.
Treasury note <US2YT=RR> was down 6/32, with the yield at
0.628 percent. The 30-year U.S. Treasury bond <US30YT=RR> was
down 1-9/32, with the yield at 4.445 percent.
On Tuesday, the U.S. Treasury debt market suffered its
worst one-day sell-off in 18 months.
Higher government bond yields tend to support the dollar,
as they reflect stronger growth and make some
dollar-denominated assets more attractive to investors. The
dollar was up against a basket of major currencies, with the
U.S. Dollar Index <.DXY> up 0.21 percent at 80.023.
Some analysts believe the U.S. tax cuts could increase the
growth in U.S. gross domestic product by as much as 2
percentage points in 2011.
The dollar's strength pushed the euro toward important
support levels around $1.3200 as the European bloc comes under
pressure over high debt levels. The euro <EUR=> was down 0.21
percent at $1.3235. Against the Japanese yen, the dollar
<JPY=> was up 0.75 percent at 84.11.
The rise in U.S. borrowing costs gave the dollar an edge
over the euro among yield-hungry investors, also delivering a
blow to gold, which has shed 2.5 percent since hitting a
record high of $1,430.95 an ounce on Tuesday, as its
investment appeal diminishes with a rise in interest rates.
Spot gold prices <XAU=> fell $25.84, or 1.84 percent, to
$1,375.50 an ounce.
U.S. light sweet crude oil <CLc1> shed 26 cents, or 0.29
percent, to $88.41 per barrel after industry data showed a
rise in inventories.
(Reporting and writing by Manuela Badawy and David Gaffen;
Additional reporting by Gertrude Chavez-Dreyfuss, Richard
Leong in New York and Amanda Cooper in London; Editing by Jan
Paschal)
