* U.S. stock futures up more than 1 pct
* Dow 288 pts, S&P 30 pts, Nasdaq 69 pts
* Defense stocks up ahead of Trump's infrastructure budget
* CSRA jumps after buyout offer from General Dynamics (Adds comment, details, updates prices)
By Sruthi Shankar
Feb 12 (Reuters) - U.S. stock index futures held on to gains of more than 1 percent as Wall Street attempts to bounce back from its worst week in two years, while volatility remains relatively elevated and U.S. bond yields hit a new four-year high.
By 8:26 a.m. ET (1326 GMT), Dow e-minis were up 288 points, S&P 500 e-minis were up 30 points, Nasdaq 100 e-minis were up 69 points.
The benchmark S&P 500 index closed up 1.5 percent on Friday, but still ended the week nearly 9 percent below its all-time high on Jan. 26 as investors fretted that the specter of rising inflation would warrant increasing interest rates at a faster-than-expected pace.
"The futures are pointing to a solid bounce in attempt to resume Friday's climb, notwithstanding the 10-year U.S. Treasury yield knocking on the 2.9 percent level," Peter Cardillo, chief market economist at First Standard Financial in New York, wrote in a note.
U.S. 10-year Treasury yields hit a new four-year high of 2.902. Wall Street's fear gauge, VIX, short for the CBOE Volatility index was last at 26.49, down from Friday's close of 29.06, but double its 50-day moving average.
"While today's bounce suggests a short-term oversold market condition is attracting buyers, one more final push to the downside is on the horizon as a 3-percent 10-year TSY yield is still not fully discounted."
Equities for years have looked relatively attractive compared to the low yields offered by bonds, but the rise in Treasury yields has diminished the allure of stocks, especially with stock valuations at historically expensive levels.
A narrowing spread between bond yields and companies' earnings yields – currently at 5.4 percent for the S&P 500 index – prompts asset allocation changes between equities and fixed income.
That, along with a reversal of bets on low volatility drew the three major U.S. indexes to correction territory last week, measured by a 10 percent decline from their record highs hit on Jan. 26.
Since that high, the S&P 500 lost $2.49 trillion in market value through last Thursday, according to S&P Dow Jones Indices.
While equity markets across the world attempt to bounce back, any recovery hinges on their ability to withstand another sharp move up in bond yields - something that will be put to the test by two important readings on U.S. inflation this week.
If the January's U.S. consumer price index due Wednesday from the U.S. Labor Department, and the producer price index the next day, come in higher than the market anticipates, that could spur further gyrations in stocks.
President Donald Trump will unveil his second budget on Monday afternoon – include $200 billion for infrastructure spending and more than $23 billion for border security and immigration enforcement.
The infrastructure and tax plans have been the key drivers of the so-called Trump rally – the U.S. market's relentless rise since Trump's election in 2016.
Caterpillar was up 1.8 percent, while defense companies Boeing, Raytheon and Lockheed Martin were also about 1.5 percent in premarket trading.
General Dynamics gained 2.3 percent after the U.S. defense contractor said it would buy smaller rival CSRA for about $6.8 billion. CSRA soared 32 percent. (Reporting by Sruthi Shankar in Bengaluru; Editing by Savio D'Souza)