NEW YORK (CNNfn) - The interest-rate wary U.S. stock market welcomed a rally in the bond market Monday, as slipping bond yields reassured investors that a looming rate increase would not be as bad as they had feared. As a result, blue-chip stocks surged in relief, but technology shares lagged.
Shortly before 1:30 p.m. ET, the Dow Jones industrial average rose 107.33 points, or nearly 1.1 percent, to 10,659.89. Volume on the New York Stock Exchange reached a strong 364 million shares, while advances crushed declines 1,839 to 1,021.
The Nasdaq composite added a relatively restrained 7.08 points to 2,559.73, while the S&P 500 index gained 12.65 to 1,327.96. (Click here for a look at today's list of CNNfn's market movers.)
The beleaguered bond market enjoyed a rally as investors covered their positions, while news of a growing U.S. budget surplus and weaker-than-expected May personal income data encouraged the inflation-wary market's bullish side. The benchmark 30-year Treasury bond surged 20/32 of a point in price, pushing the yield down to 6.09 percent.
Despite the benign economic news and ensuing bond rebound, investors in all U.S. financial markets were keeping one eye on the Federal Reserve, which meets Tuesday and Wednesday to determine interest rate policy. Most investors now expect the Fed to raise the funds rate by 25 basis points, a quarter percentage point, to 5 percent, although some fears of a sharper rate increase remained.
The dollar was mixed in cautious trading, edging slightly higher on the euro but retreating from the yen.
Rate fears ease
The day's show of strength in the bond market bled over into the stock market, where investors have fretted over the future of U.S. interest rates for weeks.
The Wall Street relief rally that followed was especially kind to interest-rate sensitive shares like financial-services and technology stocks. The sectors followed bonds higher Monday, having joined the Treasury debt market, a key reflection of long-term interest trends, in retreat through recent sessions.
Rising interest rates put pressure on the bottom line for financial firms like banks and brokers by making their primary business -- moving large sums of cash around -- relatively more expensive. Moreover, high interest rates impair lending, depriving banks of a vital source of revenue.
Among the Dow's financial components, American Express (AXP) surged 2-5/16 to 124-3/4 and Citigroup (C) climbed 1-15/16 to 45-3/4, while J.P. Morgan (JPM) gained 4-1/16 to 132-5/8.
Elsewhere in the financial sphere, shares of broker Lehman Brothers (LEH) leapt 3-3/8 to 56-13/16 amid the rate relief and news that the firm had entered into a marketing alliance with mutual fund manager Fidelity Investments. In the new arrangement, Lehman will become Fidelity's main source of research and brokerage services, while Fidelity will channel its clients to Lehman in return.
Technology companies, which rely on heavy borrowing to finance corporate growth, also flourished in the day's more relaxed tone toward the inevitability of higher interest rates, although weak Internet stocks kept the sector's broader gains subdued.
Most technological bellwethers traded narrowly higher, with Microsoft (MSFT) climbing 5/16 to 85-1/4 and Intel (INTC) gaining 1-1/16 to 56-3/8.
Computer stocks gave up their morning gains, however, with Dell (DELL) losing 1/4 to 36-11/16. On the Dow, IBM (IBM) eased 1/4 to 122-7/8 but fellow blue chip Hewlett Packard (HWP) fought the sellers, remaining up 2-7/16 at 95-1/16.
Among the leading Internet companies, Yahoo! (YHOO) lost 4-7/8 to 142 and CMGI (CMGI) fell 3-11/16 to 90-9/16, while Excite@Home (ATHM) shed 1-5/16 to 50-3/16.
Freight stocks lead transport rally
Shipping and freight stocks outpaced the broader market, pushing the Dow transportation index up 75.52 points, or nearly 2.3 percent, to 3,391.63.
Federal Express parent company FDX (FDX) led the charge, soaring 3-5/8 to 56-1/8 after receiving a vote of confidence from Merrill Lynch analyst Jeffrey Kauffman, who expects FDX to beat Wall Street's expectations when it reports second-quarter earnings Wednesday, although he cautioned that rising interest rates could hurt the stock's long-term growth potential.
According to estimate-tracking firm First Call, FDX is expected to earn 71 cents per share.
Competing freight companies got a lift from the bullish nod to the sector's biggest player, with Airborne Freight (ABF) surging 1 to 28-3/8, while CNF Transportation (CNF) gained 1 to 39-5/8.
Elsewhere on the summer earnings front, pharmacy chain Walgreen (WAG) joined the growing trickle of companies reporting strong earnings growth. Shares gained 15/16 to 28-1/2 after the company posted a fiscal third-quarter profit of 16 cents per share, beating forecasts by a penny.
In the day's deals, energy-minded investors took heart from a $1.2 billion merger between regional power provider Wisconsin Energy (WEC) and natural gas supplier Wicor (WIC). Wicor shares gained 1-9/16 to 28-1/8, but Wisconsin Energy slipped 9/16 to 26-1/2.
Nalco Chemical (NLC) shares leapt 8-7/8, nearly 21 percent, to 51-3/8 after the company agreed to a $4.1 billion buyout from water and water-treatment heavyweight Suez Lyonnaise des Eaux. Under terms of the merger, the French company will offer investors $53 per Nalco share, a premium of 24 percent above Friday's closing price.