U.S. Treasury prices edged up on Thursday as bargain hunters entered the fray after a two-day surge in yields while Asian stocks rose on hopes that stimulus measures will help the U.S. economy in the near term.

European shares hit a 26-month high on optimism that U.S. tax cuts would boost consumption. The FTSEurofirst 300 <.FTEU3> was up 0.5 percent in early trade and London's FTSE 100 <.FTSE> was 0.6 percent higher. U.S. stock index futures were up 0.4 percent.

In stark contrast to the jobless U.S. recovery that the White House is trying to shore up with tax cuts, Australia's jobs growth in November was the biggest since January, blowing past forecasts and lifting the Australian dollar and domestic shares.

The financial world is becoming split between investors who are deeply concerned that a proposal from U.S. President Barack Obama to extend tax cuts will worsen a budget shortfall, and investors who are relieved U.S. authorities are trying to use fiscal and monetary medicine for the economy.

For now the rapid selloff of U.S. Treasury debt appeared to have run its course.

Everybody is still focusing on U.S. bond yields. My hunch is that we are near a selling climax in U.S. Treasuries. Such a feeling is also in the market, dampening the dollar now, said Koichi Yoshikawa, head of foreign exchange trading with BNP Paribas in Tokyo.

The lead 10-year U.S. Treasury future was up around 9/32, after hitting the lowest since June 25 overnight. Even after the Federal Reserve's highly anticipated plan to buy more bonds to push down interest rates hatched in early November, the bond market has relentlessly sold mid to longer-maturity bonds.

Since November, the difference between 10-year yields and 2-year yields has widened by nearly 40 basis points.

Despite the selloff in U.S. bonds, patient investors have been rewarded this year. The Merrill Lynch total return index for Treasury bond maturities between 1-year and 10-years was still up 5.3 percent as of Wednesday, gains worth noting in a market where the official rate is effectively zero.

In the cash market, the benchmark 10-year yield was at 3.26 percent after climbing to 3.33 percent on Wednesday, the highest since June.

The poor performance of sovereign bond markets in the fourth quarter, especially the Treasures selloff this week, may hasten a shift from bonds to other assets such as stocks. Bob Doll, chief investment strategist at BlackRock, told the Reuters 2011 Investment Outlook Summit the deal in Washington to extend tax cuts will probably accelerate the movement of cash into equities and out of fixed income.

DOLLAR EASES

The U.S. dollar has benefited from the rapid pace of rising Treasury yields relative to other sovereign bonds. The decline lower in U.S. yields on Thursday pushed down the dollar index, a gauge of performance against six other major currencies, 0.3 percent.

The Australian dollar rose 0.8 percent to $0.9871 after employment increased by a net 54,600 jobs last month, surpassing expectations of a 19,000 gain.

Interbank rate futures tumbled while Australian government bond futures fell, unlike other sovereigns on the day.

In stock markets, Japan's Nikkei share average <.N225> hit a seven-month high though short-term measures showed the market was due for a pause, having risen 12 percent since November compared with the 6 percent advance in the MSCI all-country world index <.MIWD00000PUS>. The Nikkei ended 0.5 percent higher.

Thanks to both the yen's weakness and Nikkei futures ending higher in Chicago, the Nikkei may see more buying, but the market has been overbought, said Yumi Nishimura, a senior market analyst at Daiwa Securities Capital Markets in Tokyo.

Foreign investors gobbled up Japanese stocks last week, with net buying reaching the highest since early April, Finance Ministry data showed. Foreigners have been net buyers for 5 straight weeks, bringing the total net buying to 730.6 billion yen over the period. Out of the last 10 weeks foreigners were net buyers in nine weeks.

The MSCI index of Asia Pacific stocks outside Japan rose 1 percent <.MIAPJ0000PUS>, with gains spread evenly across all sectors.

Hong Kong's Hang Seng index <.HSI> inched up 0.4 percent in thin volume.

The end of the year is not drawing a close on the territory's IPO boom. Chongqing Rural Commercial Bank <3618.HK> raised $1.35 billion after pricing its initial public offering, sources said, a move that could spark a new wave of IPOs by mid-sized Chinese banks.

From an investment perspective, these guys have better loan growth and they can tap on the more rural areas, so investors will likely look at that, David Lai, a fund manager at CITIC Securities who manages about HK$200 million, said.

(Additional reporting by Chikafumi Hodo, Ayai Tomisawa and Hideyuki Sano in TOKYO and Kelvin Soh and Denny Thomas in HONG KONG; Editing by Sanjeev Miglani)