US Treasuries steadied after dismal demand at an auction of five-year debt on Tuesday sent yields higher, boosting their relative value for some investors. The dollar fell against a basket of major currencies.
Investors are turning to riskier assets as 2010 draws to a close, persuaded that the world economy is on the mend. They also expect that the higher interest rates that typically follow stronger growth will hurt returns on government bonds and other safe-haven assets, relied on since the financial crisis erupted.
Asset allocations are seen by many analysts, including some bond pickers, as favoring stocks in the new year.
"The first few days of the new year will be good as a lot of new money will flow into the market," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels. "But people will become cautious again," he added.
Much of stocks' gain came after Federal Reserve Chairman Ben Bernanke made it clear in August that the Fed was willing to buy more assets in order to pump liquidity into the slowing US economy.
This so-called quantitative easing and tax stimulus measures have bolstered economic forecasts.
MSCI's all-country world stock index rose 1.7 percent to 330.32 for a new 2010 peak and the highest since Sept. 3, 2008. The index's emerging market counterpart rose more than 1 percent.
In New York, the Dow Jones Industrial Average gained 30.31 points, or 0.26 percent, to 11,605.85. The Standard & Poor's 500 Index added 2.83 points, or 0.22 percent, at 1,261.34 and the Nasdaq Composite Index rose 5.97 points, or 0.22 percent, to 2,668.85.
The S&P 500 has risen almost 7 percent this month, pushing the benchmark index above levels reached on Sept. 12, 2008, the last trading day before Lehman Brothers collapsed, as improving economic data and a changed political landscape have encouraged risk-taking.
"People are hoping that the consumer is back and that will help fuel the engine and grow some earnings so that companies will start hiring," said Frank Ingarra, a portfolio manager at Hennessy Funds in Stamford, Connecticut.
The Nasdaq, copper and gold have been the big winners this year.
In Europe, the FTSEurofirst 300 rose about a quarter of a percent. Japan's Nikkei gained 0.5 percent.
US Treasury note prices bounced on Wednesday after thin demand for a $35 billion five-year note auction led traders to drub the sector on Tuesday. Despite bargain-hunting, anxiety lingered over the drumbeat of debt sales the government will make to fund its deficit, including Wednesday's $29 billion in seven-year note sale.
The Treasury will hold the auction, the last of 2010, at 1 p.m. EST (1800 GMT).
US bond yields have soared a full percentage point since October on expectations that growth will accelerate in 2011, while concerns over the US deficit have raised inflation fears and sapped demand for the debt.
The 10-year US Treasury yield declined 0.06 percentage point to 3.43 percent. The Treasury selloff on Tuesday dented demand for euro zone government debt.
In currency trading, the dollar fell against the yen as the return to Japan of company earnings at year-end outweighed higher US bond yields.
Commodity gains boosted the Australian and New Zealand dollars, while the euro edged up against the US dollar after holding above its 200-day moving average.
Most analysts are bracing for more euro weakness in early 2011, but the currency's stubborn refusal to break below the 200-day moving average, now at $1.3084, has frustrated bearish investors.
The dollar fell against major currencies, with the US Dollar Index off 0.46 percent at 79.993. The euro rose 0.5 percent to $1.3182, while the dollar-yen exchange rate dropped 0.7 percent to 81.88 yen.
In commodities, US light sweet crude oil fell 34 cents, or 0.37 percent, to $91.15 per barrel, and gold rose $5.86, or 0.42 percent, to $1411.80.
