Bank stocks up, bond yields dip after Portuguese bank rescue

NEW YORK (Reuters) - Bond prices rallied and European bank stocks rose on Monday after Portugal devised a plan to prevent the collapse of one of its biggest lenders.

U.S. stocks were also higher heading in the latter stages of trading, with the S&P 500 <.SPX> coming off its worst week since 2012, as concerns over higher U.S. interest rates eased following Friday's U.S. employment report.

"The S&P has had a huge run, and it's earned the right to sit for a bit. The key is to make sure selling remains somewhat contained," said Adam Sarhan, chief executive of Sarhan Capital in New York. "We're in a very strong bull market right now."

Portugal on Sunday announced a nearly 5 billion-euro ($6.6 billion) rescue of the country's largest listed bank, Banco Espirito Santo , preventing it from collapsing and potentially destabilizing the regional banking sector.

Portugal's 10-year yield fell to 3.651 percent, down 7 basis points, as investors bought the bonds on relief after the package was announced. Other European bond markets also rallied, with yields on Spanish and Italian bonds moving lower .

The FTSEurofirst 300 <.FTEU3> index of leading shares closed down 0.19 percent, giving up early gains. Pan-European banking stocks <.SX7P> finished up 0.3 percent, however.

The MSCI All-World Index <.MIWD00000PUS> advanced 0.3 percent.

U.S. financial shares rose <.SPSY> 0.7 percent, buoyed by a 3.1 percent gain in Berkshire Hathaway after the company helmed by Warren Buffett said on Friday that second-quarter profit soared 41 percent.

The Dow Jones industrial average <.DJI> was up 68.49 points, or 0.42 percent, at 16,561.86. The Standard & Poor's 500 Index <.SPX> was up 13.13 points, or 0.68 percent, at 1,938.28. The Nasdaq Composite Index <.IXIC> was up 30.77 points, or 0.71 percent, at 4,383.41.

FED FEARS EASE

The rate-sensitive U.S. two-year Treasury note yield was little changed at 0.4723 percent and the 10-year yield fell to 2.49 percent , declining in tandem with European yields.

Bond yields were also capped by Friday's U.S. jobs data for July, which showed job growth lower than forecast, the unemployment rate higher than expected and almost no growth in average hourly earnings.

A Reuters poll on Friday after the jobs data showed that a majority of top Wall Street bond firms do not see a rise in U.S. interest rates before the second half of next year.

"The real question becomes, will the Fed be able to transition and exit from QE3 gracefully?" Sarhan said.

Major currencies were little changed on Monday. The euro was at $1.3420, off last week's eight-month low of $1.3365, while the dollar stood at 102.47 yen, off Wednesday's four-month peak of 103.08 yen.

U.S. crude oil futures settled up 41 cents at $98.29 per barrel , recovering from a six-month low of $97.09 on Friday, and Brent crude settled up 57 cents at $105.41 a barrel. Spot gold edged down 0.4 percent at $1,287.75 an ounce.

(Additional reporting by Akane Otani; Editing by Dan Grebler)

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