BOND REPORT: Treasury Bonds Gain As U.S. Stocks Fall By Polya Lesova

Treasury prices gained Monday, sending yields lower, as falling U.S. stocks whetted appetite for government bonds.

Ten-year Treasury note yields (UST10Y), which move inversely to prices, fell 2 basis points to $3.820%.

Two-year note yields (UST2YR) dropped 4 basis points to $2.345%.

"Treasury yields are back down at lows, while stocks remain in the red and the dollar index below highs," said analysts at Action Economics.

On Wall Street, U.S. stocks fell, with worries about ailing financials rekindled by several media reports, while a turn lower in crude-oil prices failed to provide much momentum.

Thirty-year note yields (UST30Y) dropped 3 basis points to $4.435%.

"Market activity seems to be saying that the Fed is on hold and the U.S. economy is in pretty bad shape," said Kevin Giddis, managing director of fixed income at Morgan Keegan & Co., in a research note.

"The proof is in the numbers and it is not just a domestic problem either," Giddis said. "We are in the midst of a global slowdown which is actually working in our favor. It strengthens the dollar and lowers oil prices."

On Friday, Treasurys rose, sending yields sharply lower, as tumbling commodity prices eased worries about inflation and boosted expectations that the Federal Reserve will not raise interest rates this year.

Housing data on tap

The U.S. economic calendar is fairly light Monday. At 1 p.m. EDT, the National Association of House Builders will issue its August index.

Economists at Merrill Lynch expect the index to rise to 17 from 16 in July.

"This is still a level that suggests depressed activity in the housing market and reflects little change," the Merrill economists noted.

"Inventory levels remain elevated in the new home market and buyers continue to be scarce, as marked by the 'traffic of prospective home buyers' index,'" they said.

Housing starts data will be released on Tuesday and leading indicators data are due for release on Thursday.