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GLOBAL MARKETS-U.S. 10-year yield at 2-year high, stocks rally

David Gaffen and Blaise Robinson
Friday, 27 Dec 2013 | 11:08 AM ET

* U.S. 10-year bond yield above 3 percent

* World equities markets keep rallying; U.S., Germany at records

* Turkey's lira hits record low as political crisis deepens

* Yen hits 5-year lows; euro rises to 2-year high at $1.3892

NEW YORK/PARIS, Dec 27 (Reuters) - U.S. benchmark government bond yields rose above 3 percent, hitting a two-and-a-half year high on Friday, while major global equity markets extended gains to a seventh day in a broad year-end surge.

The U.S. 10-year Treasury note yield rose to a high of 3.02 percent, reflecting signs of improvement in the U.S. economy and expectations that the Federal Reserve will steadily withdraw stimulus that kept a lid on interest rates for several years.

The latest selloff will assure this will be one of the worst years ever for the Treasuries market, as the 10-year yield has risen 1.25 percentage points in 2013.

But stock markets took the bond selloff in stride. The MSCI World Index rose as much as 0.5 percent and has gained nearly 20 percent for the year.

"The stock market has clearly discounted what the Fed has said. This is a 'Santa Claus' rally," said Quincy Krosby, market strategist at Prudential Financial in Newark, which has $1 trillion in assets under management.

Turkey was again in the spotlight, with the lira hitting a record low and stocks falling to their weakest level in 17 months as a corruption scandal pitting the government against the judiciary took its toll on markets.

Wall Street was little changed after four days of gains for the benchmark S&P 500. Major U.S. averages have set records on a near-daily basis as investors absorb the rise in interest rates, a sign of growing confidence in improved economic demand.

The Dow Jones industrial average was down 12.62 points, or 0.08 percent, at 16,467.26. The Standard & Poor's 500 Index was down 1.11 points, or 0.06 percent, at 1,840.91. The Nasdaq Composite Index was down 8.44 points, or 0.20 percent, at 4,158.74.

Strength in equities was evident elsewhere around the world. In addition to the United States, which is on track for its best year since 1997, Japan's Nikkei stock average is up more than 55 percent so far in 2013, its best annual performance since 1972, driven by that country's aggressive fiscal and monetary stimulus.

"The market feels unstoppable right now with growth coming back, inflation under control and central banks ultra supportive. My main worry is to what extent this is priced into the market already," said Lex van Dam, hedge fund manager at Hampstead Capital.

Germany's DAX gained 0.8 percent on Friday to hit a record, with the index up nearly 26 percent in 2013, following a 29 percent gain in 2012.

Emerging markets have been a noted exception to the equity rally in 2013, with the MSCI EM Index down 5.5 percent this year.

Japan's low-yielding yen extended losses, hitting 105 to the dollar for the first time in five years and a five-year low against the euro. It traded at $104.86.

ASSET QUALITY REVIEW

The euro climbed against the dollar, hitting a peak of $1.3894 according to EBS, highest since October 2011. It had ticked back to about $1.3793, still up 0.75 percent on the session.

Though the euro zone's economic recovery is seen as sluggish, the currency has been underpinned by European banks' repatriation of assets, as well as buying by the region's exporters as its current account surplus has increased sharply.

The European Central Bank will take a snapshot of the capital positions of the region's banks at the end of 2013, which it will use in conducting an asset-quality review, or AQR, next year to work out which of them will need fresh funds.

This has led to some demand for euros from banks to help shore up their balance sheets, traders said.

"There's a lot of attention on the AQR, and there's some positioning ahead of the end of the calendar year," said John Hardy, FX strategist at Danske Bank in Copenhagen.

London copper rose to its highest level in four months, with signs of economic revival in Asia and the United States burnishing the demand outlook for metals.

Gold rose to $1,216 in thin holiday trade, but was on track for its biggest annual loss in three decades.

Brent crude oil was up 0.6 percent at $112.68 a barrel on Friday. U.S. light sweet crude rose 0.98 percent to $100.53 a barrel.