World stocks extend gains on upbeat U.S. data

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. and European government bond yields jumped on Thursday, with the yield on U.S. 10-year Treasury notes rising to the highest in more than 25 months, as economic data supported the view the Federal Reserve will reduce its bond purchases this month.

U.S. stocks climbed for a third day as the data showed further signs of improving U.S. economic conditions. Growth in the U.S. services sector accelerated in August to its fastest pace in almost eight years.

Stocks' gains were limited by the possibility of a Western-led strike against Syria, which drove shares down last week.

The data, which follows an upbeat U.S. manufacturing report earlier this week, bolstered expectations the Fed will announce at a policy meeting later this month that it will begin winding down its stimulus plan.

"You are seeing a normalization in the economy so you should see a normalization in rates," said Craig Elder, fixed income strategist at Baird Private Wealth Management in Milwaukee.

Global central banks have attempted to talk down expectations of any rate rises and left loose policies unchanged, as data from China, Britain and the euro zone point to a global economic recovery that is gathering steam.

As widely expected, the European Central Bank, the Bank of Japan, Sweden's Riksbank, and the Bank of England all left policy unchanged on Thursday.

Benchmark 10-year Treasury notes last traded down 21/32 in price, yielding 2.975 percent, up 7.8 basis points from late on Wednesday. The 10-year yield rose to a session high of 2.986 percent, a level not seen since July 2011. It was a fourth straight session of gains for benchmark yields.

Investors also dumped foreign bonds, sending German and British 10-year government debt yields to their highest levels in 1-1/2-years and since July 2011, respectively.

The next big economic event to watch will be Friday's U.S. employment report. If it confirms a recovery in the job market, that would strengthen the view the Fed could begin scaling back its $85 billion per month of debt purchases sooner rather than later.

The prospect of higher rates spilling over to affect the rest of the world prompted Russia and China to warn at the G20 leaders' meeting in Russia that the end of the Fed's bond-buying program could have a profound impact on the global economy.

MSCI's world equity index was up 0.2 percent, and European shares ended up 0.5 percent.

U.S. stocks' gains were limited by the possibility of a Western-led strike against Syria.

On Wall Street, the Dow Jones industrial average was up 21.22 points, or 0.14 percent, at 14,952.09. The Standard & Poor's 500 Index was up 3.75 points, or 0.23 percent, at 1,656.83. The Nasdaq Composite Index was up 13.15 points, or 0.36 percent, at 3,662.19.

SYRIA ACTION

Brent oil prices traded above $115 a barrel, receiving a boost as U.S. President Barack Obama won some support from lawmakers for a military move against Syria. But both Brent and U.S. oil prices pared gains as the U.S. data hinted the Fed could be closer to winding down its bond buying.

Brent crude was up 23 cents at $115.14 a barrel. U.S. oil gained $1.14 to settle at $108.37 a barrel.

Gold sank to two-week lows as the upbeat U.S. data heightened expectations of Fed tapering. Building on Wednesday's 1.5-percent drop, spot gold was down 1.6 percent at $1,368.14 an ounce.

The possible military strike against Syria in reaction to its alleged use of chemical weapons, and the Fed's potential to reduce its stimulus, were also dominating discussions at the meeting of leaders from the Group of 20 economies in St. Petersburg.

Obama faced growing pressure from world leaders at the summit not to launch military strikes in Syria.

DOLLAR UP AGAINST EURO

The dollar rose against the euro as ECB President Mario Draghi said the bank's Governing Council expects key ECB interest rates to remain at present or lower levels for an extended period.

The dollar index was up 0.7 percent at 82.626, not far from a seven-week high of 82.6271 touched earlier in the New York session. The euro was down 0.7 percent at $1.3123 after falling to a seven-week low of $1.3109.

(Additional reporting by Richard Hubbard in London and Nick Olivari and Richard Leong in New York; Editing by Stephen Nisbet, Nick Zieminski and Chris Reese)