Prices for the 10-year Treasury rose, sending yields to just below 5%.
Wall Street kicked off the first day of trading in the third quarter with a broad rally. U.S. markets will close early on Tuesday ahead of Wednesday's Independence Day holiday. Breadth was positive with advancing shares led decliners by nearly three to one on the New York Stock Exchange.
Buying took place across the board with all ten economic sectors tracked by S&P closing higher. Monday's gains were led by the interest rate-sensitive utilities sector, with materials and REITs also making strong showings. Strength in technology helped to boost the Nasdaq.
Energy stocks also made gains as New York light sweet crude futures rose to trade above $71 a barrel. Consumer stocks lagged other sectors although both discretionary and staples consumer stocks closed with gains of more than 0.7%.
"Certainly today's rally has been driven by the M&A activity and economics," said Phil Orlando, chief equity market strategist at Federated Investors.
"There's still a lot of money floating around the marketplace that's looking for a home," said Martin Weiss, president of Weiss Research Group. "It's driven by liquidity and not necessarily fundamental strength in the U.S. economy. The U.S. market is rising, but not as quickly as foreign markets."
Shares of Research In Motion continued to soar after it reported stronger than expected earnings last week and announced a 3-for-1 stock split.
Apple sold about 525,000 iPhones in the first weekend since its launch, selling out of the device in half of the Apple stores on the U.S. West Coast, but received complaints from some customers who couldn't activate the phone.
In M&A news, the battle to take over Canadian telecom giant BCE continued as U.S. buyout firm Cerberus Capital Managementconsidered renewing its bid despite losing out to the Ontario Teachers Pension Plan, reported Toronto's Globe and Mail, citing sources close to Cerberus.
Virgin Media said it received a buyout bid following reports that Carlyle Group had offered to acquire it for more than eleven billion dollars. The telecommunications company, which did not disclose the price of the offer, said the proposal stipulates that the offer will be withdrawn if the terms are disclosed.
Meanwhile, the future of two struggling hedge funds owned by Bear Stearns will remain in doubt as it could take until July 16 to tally the losses, the Wall Street Journal reported on Monday. CNBC's Charlie Gasparino reported that Bear Stearns could be targeted for a takeover if losses from two hedge funds turn out to be steep as the company's stock price continues to fall.
In economic news, the monthly index of manufacturing activity rose a point to 56, according to the Institute for Supply Management. The ISM index came in above economists' consensus forecast of 55, rising to its highest level since April. A reading above 50 indicates manufacturing expansion.
European Stocks Close Lower
European shares closed lower Monday as a lack of fresh corporate and economic news left investors dwelling on the rising cost of corporate lending.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all closed modestly weaker.
Geopolitics remained in focus following a car-bomb attack at Scotland's Glasgow Airport Saturday, which led the U.K. to lift its terror alert to the highest level.
Barclays' bid for ABN Amro gained extra time as Dutch market regulator AFM gave the U.K. bank a deadline extension for its formal offer documents, which detail Barclays' bid for the Dutch bank. The documents will now need to be submitted by July 23.
Meanwhile bookmaker William Hill said its first-half earnings would be in-line with its previous expectations.
Asian Stocks Mixed
Tokyo's Nikkei 225 Average gained slightly to end at its highest in six sessions as commodities-related shares such as trading house Mitsubishi Corp. and Sumitomo Metal Mining rose after oil and copper prices soared.
Department store chains Takashimaya and Mitsukoshi fell on weaker earnings, and property firms declined after the Bank of Japan's quarterly tankan survey of corporate sentiment showed the sector less optimistic about the coming three months.
The Bank of Japan's June tankan survey -- released before the market open -- showed firms remained optimistic about business conditions with the headline diffusion index for big manufacturers' sentiment steady at plus 23, in line with market forecast.
In South Korea, the Kospi Index bucked the losing trend to finish 1.6% higher as a rally in brokerage stocks and gains in some outperformers including LG.Philips LCD outweighed concerns over high oil prices and the stronger won.