TREASURIES-Bonds drift lower despite Fed as stocks rally Mon May 18, 2009 11:41am EDT

By Pedro Nicolaci da Costa

NEW YORK, May 18 (Reuters) - U.S. Treasury debt prices eased on Monday as equity markets rallied sharply, denting demand for safe-haven government bonds.

Losses were contained as the Federal Reserve stepped in to buy another $3.18 billion in longer-dated maturities.

Trading was relatively subdued as investors waited for data on the housing market, with an index of homebuilder sentiment out at 1 p.m. (1700 GMT).

In the meantime, a sharp jump in equities, driven in part by stronger results from home improvement retailer Lowe’s (LOW.N), was keeping bonds in negative territory as risk appetite revived.

"It’s really just a reallocation trade," said Calvin Sullivan, trader at Morgan Keegan.

Benchmark 10-year notes US10YT=RR were down 3/32 and offering a yield of 3.14 percent, up one basis point on the day. The 30-year bond US30YT=RR was off just under half a point and yielding 4.11 percent, having hit a recent closing peak of 4.32 percent on May 7.

The Dow Jones industrial average was 1.86 percent higher at 8421.08.

The Fed’s Treasury purchases included bonds maturing IN August 2019 and February 2023.

Bond yields have been creeping steadily higher for two months on evidence that the pace of economic decline was slowing. But doubts about a second-half recovery have helped the market recover some ground. Benchmark 10-year rates have fallen about 0.25 percentage point in just over a week.

World Bank President Robert Zoellick supported the view of an improving outlook on Monday, saying the rate of global economic contraction is set to slow, possibly leading to renewed expansion by later this year.

"The question is when we will return to growth in the global system and that could be late 2009 or 2010. I don’t think this will be 2011," he said. (Editing by Leslie Adler)