U.S. stocks rose Monday on strong Merck & Co. profits and news of a nearly $18 billion oil services takeover, while Treasury bonds eased as reduced fears about the subprime credit market made riskier assets attractive again.
Rising stock prices lured investors out of U.S. government bonds, which rallied last week on safe-haven buying sparked by investor fears of a possible blowup in the subprime mortgage sector.
The fall in Treasury prices pulled benchmark yields back from recent six-week lows, and the dollar edged higher against the euro, recovering from a record low.
Stocks also got a boost from a nearly $1 drop in oil prices after some funds booked profits as OPEC expressed concern over near-record prices and pledged to pump more crude if needed.
In equities markets, U.S. drug maker Merck, a Dow component, reported quarterly results above analysts' expectations and raised its outlook.
Transocean Inc., the world's largest offshore driller, said it would buy drilling rig operator GlobalSantaFe Corp. in the $18 billion deal including stock and a pay-out to shareholders of both companies totaling about $15 billion.
The continued ... takeover premium is helping the market, said John O'Brien, senior vice president at MKM Partners LLC in Cleveland. Investors are afraid to sell (stocks) and afraid to be short.
Merck shares jumped 8.2 percent, their biggest gain in more than three months, to lead advances on both the Dow Jones industrial average and Standard & Poor's 500 Index.
Shares of Transocean rose 5.97 percent and GlobalSantaFe's shares advanced by 5.12 percent. The S&P oil & gas index was up 4.61 percent.
The Dow was up 105.02 points, or 0.76 percent, at 13,956.10 and the S&P 500 was up 9.61 points, or 0.63 percent, at 1,543.71. The Nasdaq Composite Index was up 8.00 points, or 0.30 percent, at 2,695.60.
In the U.S. Treasury market, the benchmark 10-year U.S. Treasury note was down 3/32, with the yield at 4.9664 percent.
I think we need continued problems on the credit market front and weaker economic data to keep (yields) below 5 percent on the 10-year Treasury, said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co. in Seattle.
Foreign exchange traders were awaiting economic data later in the week to see whether trouble in U.S. credit markets has spread to other sectors.
Overnight, the dollar briefly touched a record low against the euro and a 26-year low against sterling, but short-term investors closed their bets against the greenback after they were unable to push it down more, allowing it to stabilize.
The euro was down 0.16 percent at $1.3804 from a previous session close of $1.3826. Against the Japanese yen, the dollar was down 0.02 percent at 121.25 from a previous session close of 121.27.
U.S. light sweet crude oil fell 93 cents, or 1.23 percent, to $74.86 per barrel.
In overseas trading, The pan-European FTSEurofirst 300 index finished 0.6 percent stronger at 1,609.7, the day's high.
Earlier, Japan's Nikkei average sank 1.07 percent to its lowest close in nearly four weeks. It lost 194.29 points to 17,963.64. The broader TOPIX index declined 1.06 percent to 1,757.29.
Gold steadied on Monday, holding near 10-week highs as the dollar dropped against the euro. Spot gold prices fell $2.30, or 0.34 percent, to $681.00.
(Additional reporting by Burton Frierson, Kevin Plumberg and Ellis Mnyandu in New York, and Jeremy Gaunt, Pratima Desai and Anshuman Daga in London)