NEW YORK (CNN/Money) - Bonds rallied Thursday on the heels of steep selloff the previous day and a better-than-expected auction of new debt, while the dollar extended losses on talk of central bank diversification.

The benchmark 10-year note advanced 13/32 of a point to 96-7/32 to yield 4.47 percent, down from 4.51 percent late Wednesday. The 30-year bond jumped 1-4/32 points to 109-3/32 to yield 4.76 percent, down from 4.82 percent late Wednesday. Bond prices and yields move in opposite directions.

The five-year note added 4/32 of a point to yield 4.14 percent, while the two-year note was little changed at 11-13/32 to yield 3.67 percent. (Click here for bond charts.)

Treasuries rallied following the sale of $9 billion in 10-year notes that were a reopening of an issue first sold last month. The debt attracted bids for 2.35 times the amount on offer, compared with an average 2.39 for last year's four reopenings.

Indirect bidders, including private investors and foreign central banks, bought $1.04 billion, or 11 percent of the whole issue, which was better than the 10 percent seen at the last reopening.

"Initially we turned a little lower after the auction results, but in the end we turned a little higher," John Canavan, market analyst at Stone and McCarthy Research Associates told Reuters. "It just seems as if the market has been able to recover partially after the losses of the last two days."

Treasury prices skidded Wednesday, with yields on the ten-year note spiking to the highest levels since July, following a "Beige Book" that indicated the U.S. economy continued to expand in January and February.

An unexpectedly soft reading on initial jobless claims also supported bonds, with the number of Americans filing initial jobless claims rose last week to 327,000.

The government report was well above Wall Street economists' forecasts for 310,000, but traders remained cautious.

"Yes, the market developed a fear that employment would be stronger than it turned out to be, but it was still a pretty solid number, above economists' consensus forecast, so in general you're looking at recent economic numbers that have bond traders a little bit concerned," John Canavan, market analyst at Stone and McCarthy Research Associates, told Reuters.

"The charts are bad, the fundamentals aren't friendly, and the seasonals are bearish," noted Peter McTeague, head of U.S. government bond strategy at RBS Greenwich Capital.

In the currency market, the euro bought $1.3433 early Thursday, up from $1.3387 late Wednesday, while the dollar bought ¥104.03, up from ¥103.96 late Wednesday.

After hitting multi-month lows against its major counterparts Wednesday, the dollar extended losses against most major currencies on news that Japanese Prime Minister Junichiro Koizumi said diversity in foreign exchange reserves was a good thing.

Japan's Ministry of Finance, which manages the world's largest foreign reserve holding of $840.6 billion, quickly clarified that it has no plans to shift funds out of the dollars.

"Although the MoF quickly suggested that they had no plans to change now, the suspicion lingers that more Asian central bank diversifiers are to appear," Goldman Sachs analysts wrote in a research note obtained by Reuters.

But the specter of diversification pressured the dollar, just as it did after South Korea's central bank mentioned the subject in a report last month. However, the greenback's slide against the yen was tempered by a report showing weak Japanese core machinery orders.

"The 'diversification' word really spooked the market ... but the bond market selloff is weighing on the dollar big time," said Samarjit Shankar, director of global strategy at Mellon Bank in Boston. "The bond market is really adding that extra piece of weight on the dollar right now."

Worries about inflation have pushed the yield on the benchmark 10-year note to its highest level in more than three months, when Reuters reported that the yield hit a high of 4.42 percent during the session and "closed" at 4.41 percent on December 2.