Bonds fall on stock gains
Better-then-expected earnings from Bank of America drive investors away from Treasurys.
NEW YORK (CNNMoney.com) -- Treasury prices eased Monday as stocks opened higher, lifted by stronger-than-expected earnings from Bank of America, and as the dollar lost ground to the euro.
The benchmark 10-year note fell 1/32 to 98 8/32 and yielded 4.09%, up from 4.08%. Bond prices and yields move in opposite directions.
The 2-year note declined 3/32 to 100 11/32 and yielded 2.68%, up from 2.64%. The 30-year long bond slid 1/32 to 95 17/32; its yield held steady at 4.65%.
Stocks rally: The stock market rallied Monday, as better-than-expected earnings from Bank of America (BAC, Fortune 500) lifted the financial sector.
The bank's second-quarter earnings fell 41% to 72 cents per share, but came in much better than investors had hoped.
Bank of America also said it expected its acquisition of mortgage lending giant Countrywide Financial, to add to the year's earnings. Previously, the bank said the struggling lender, which was acquired for $4.1 billion, would have no effect on earnings.
Last week, other large financial institutions such as Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) reported better than-expected earnings, pulling money away from government debt.
"It's given people a little bit of comfort that, maybe the financial crisis isn't over, [but] the pace of losses may have slowed down," said Steve Van Order, chief fixed income strategist at Calvert Funds.
Investors often buy bonds to hedge against weakness in the stock market. On the other hand, a strong stock market, which has traditionally been more profitable, can pull investors away from bonds.
Bond investors will also be paying close attention to results from smaller regional banks this week, said Order.
The government bailout of IndyMac Bank earlier this month sparked concerns for other smaller financial institutions that may fall prey to further mortgage-related losses.
Inflation: Bonds were also lower as the dollar turned lower versus the euro.
Last week Jean-Claude Trichet, president of the European Central Bank, said he expected the euro-zone economy to return to moderate growth later this year, while inflation of the 15-nation euro will drop back to 2% in mid-2009.
Bond investors have also been taking into account statements from regional Fed governors that they will work soon to raise interest rates and boost the U.S. dollar, according to Andrew Brenner, senior vice president at MF Global.
"[Minneapolis Fed Governor Gary] Stern on Friday couldn't have been more bearish," said Brenner.
Last week Stern said the Fed needed to raise rates before the housing and financial markets stabilize, according to news reports.
Brenner said he thought raising rates right now was a bad idea. The Fed was unlikely to follow through, he said, because the credit crisis had not reached its conclusion. However, it was being factored into bond prices regardless.
The Federal Reserve meets on Aug. 5 to make its next decision on interest rates.
Oil: This week investors will also be paying attention to oil, which has been closely tied to the value of the dollar.
Oil shed more than $16 a barrel last week, mostly on concerns about Iran and falling demand. If oil prices turn lower this week, it could send two conflicting messages to bond investors, according to Michael Cheah, bond mutual fund manager at AIG SunAmerica.
Lower oil prices would send overall inflation down, which would boost bonds, said Cheah.
"But a lower oil price would also bring about a [stronger] stock market," he said. Stronger stocks send bonds lower. 
