World stocks rally on U.S. Treasury's plan

NEW YORK (Reuters) - World stocks rallied further on Monday as Washington's plans to ease the global financial crisis with purchases of up to $1 trillion of troubled bank assets boosted investor risk appetite, but U.S. Treasury debt and currency markets remained skeptical of the plan.

The Dow Jones Industrials Average .DJI jumped 262.44 points, or 3.6 percent, to 7,540.55 in mid-morning trading in New York. The S&P500 index .SPX rose more than 3.5 percent to 796.47.

Equity investors cheered plans announced by U.S. Treasury Secretary Timothy Geither aimed at helping rid banks of risky mortgage bonds and other hard-to-trade assets that have been weighing down balance sheets and clamping off credit.

Such assets have been the Achilles' heel of global credit markets, causing huge write downs of bank assets, restricting lending and plunging many economies into recession, analysts said.

U.S. stocks also extended gains after a report showed sales of existing homes in the battered U.S. housing market rebounded in February.

The MSCI World index, a gauge of global stocks performance, was up 2.8 percent and has now risen for nine out of the last ten days.

U.S. government bonds were mixed, while the U.S. dollar gained as investors sized-up the potential impact on the debt securities often used as a safe-haven in turbulent markets. These markets suggested investors remained skeptical about the success of the program, investors said.

"It remains ... how willing banks will be to release loans and securities at distressed prices, and how much of these losses may be recouped by capital replenishment," said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union in New York.

Benchmark 10-year notes rose 3/32 in price to yield 2,624 percent compared with Friday's close.

Residential and commercial mortgage bonds saw prices firm from distressed levels as they stand to gain most from the U.S. Treasuries plan to buy bad bank assets.

Prices on CMBX "AAA" rated commercial mortgage-backed securities indexes gained 2 1/2 to 3 points, to levels around 63, an investor said, citing a dealer. Subprime residential bond ABX derivatives indexes jumped 2 to 3 points as investors unwound bearish bets, he added.

Lingering doubts on success of the Geithner plan led some foreign exchange traders to unwind bearish bets on the dollar versus the euro.

The euro was down 0.1 percent against the dollar at $1.3563 after going as low as $1.3548.

"There's nothing new about what Geithner had said so we're seeing a bit of profit-taking on euro/dollar after it rallied on expectations about the bailout plan," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

"On top of that, I think there are still some lingering concerns about the details of the plan, specifically at what price the government will buy the assets. So we're seeing the dollar rise a little bit because of this."

Details of the U.S. toxic debt plan, which surfaced over the weekend, extended a nearly two-week global stock market rally fueled by hopes that the financial system is stabilizing after some of the largest U.S. banks, including Citigroup Inc. (C.N), said results were solid for January and February.

But the balance of risks is skewed to the downside in terms of economic data and the first-quarter reporting season that kicks off in a few weeks, according to JPMorgan.

(Additional reporting by Richard Leong, Ellis Mnyandu, Nick Olivari and Gertrude Chavez Dreyfuss in New York, and Peter Starck in Frankfurt)