* Pressure rises on U.S. bonds
* World stocks add to recent gains
* Chinese stocks rally on relief about interest rates
* Dollar stronger, euro slips
By Jeremy Gaunt, European Investment Correspondent
LONDON, Dec 13 (Reuters) - Selling pressure on 10-year U.S.
Treasuries drove yields to fresh six-month highs on Monday as
investors threatened to undo this year's bond rally on signs of
global economic recovery and deeper U.S. deficits.
World shares added to an end-of-year rally, with gains in
Japan and Europe, and Chinese stocks posted their biggest gains
in two months as prospects of interest rate increases eased.
The dollar fell against a basket of major currencies <.DXY>,
U.S. Treasury yields <US10YT=TWEB> were up around 4 basis
points to just 3.365 percent, having earlier hit levels not seen
for six months. Yields -- which move inversely to prices -- had
shot up as much as 20 basis points last Wednesday alone on a
combination of expectations that the U.S. economic climate will
improve and worries that proposed extensions of tax cuts will
bloat the fiscal deficit further.
Investors have also begun reappraising the likelihood of
further bond-buying by the U.S. Federal Reserve after its
current $600 billion quantitative easing programme is completed.
Monday's selling had some impact on short-term U.S. paper,
suggesting investors may begin pricing in raised expectations of
higher interest rates next year.
"If the market really thinks there will be a rate hike
within a year, then the two-year yield could rise near 1
percent," said Tomoaki Shishido, a fixed-income analyst at
Nomura Securities in Tokyo, adding that he did not believe there
would be such a rate rise.
The two-year note <US2YT=TWEB> was yielding 0.66 percent, up
two basis points but off its highs.
Wariness about holding low-yielding U.S. government debt had
little impact on Europe, where the 10-year German Bund
<DE10YT=TWEB> was flat.
FX AND STOCKS
European bonds are trading against the complex backdrop of
the euro zone debt crisis, set to be the main topic later in the
week at an EU summit that will seek some way of easing fiscal
pressures weighing on currency bloc's weaker economies.
The euro was up a third of a percent against the dollar at
$1.3233 (EUR=>. The shared currency had earlier come under
pressure from expectations that U.S. assets will yield higher
returns.
Currency speculators trimmed short positions against the
dollar last week but more than doubled their bets against the
euro, according to data from the Commodity Futures Trading
Commission, signalling growing bearishness. []
On stock markets, investors were building up gains before
the Christmas/New Year break.
MSCI's all-country world stock index was up 0.4 percent for
a more than 8.5 percent year-to-date gain. <.MIWD00000PUS>
"Market sentiment is bullish because of strong economic data
and some positive policy announcements in the United States in
the past weeks," said Koen De Leus, strategist at KBC
Securities, in Brussels.
Europe's FTSEurofirst 300 <> gained 0.5 percent and
Japan's Nikkei <> closed up 0.8 percent.
China's key stock index <> closed up 2.9 percent on
relief that the central bank raised lenders' reserve
requirements to curb inflation last week instead of hiking
benchmark interest rates.
The market had been worried about a rise in rates, thus the
increase in bank reserve requirement ratios (RRR) late on Friday
was greeted with more active buying.
(Additional reporting by Atul Prakash; Editing by John
Stonestreet/Ruth Pitchford)
