* Stock rally drains demand for government debt
* May builder sentiment index reads 16, up from April
* Eye on April housing starts data due on Tuesday (Updates comment, prices)
By Ellen Freilich
NEW YORK, May 18 (Reuters) - U.S. Treasury debt prices fell on Monday as hopes that the recession was easing drove up stocks and lured investors away from safe-haven government bonds.
Stocks rose as solid results from No. 2 U.S. home improvement retailer Lowe’s Cos Inc (LOW.N) raised hopes that consumer spending -- and the economy -- were stabilizing after a sharp contraction.
Financial shares also rose on positive comments on Bank of America Corp (BAC.N), with Citigroup saying it expects the bank to report a second-quarter profit instead of a loss.
“Show me higher stocks and I’ll show you lower government bond prices,” said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.
“The renewed rally in the broad equity averages is a symbol of economic recovery and of investors’ willingness to take on riskier assets,” he said. “Funds are moving to stocks and other assets so some cash is coming out of the government securities market.”
Bond yields have been rising for two months on evidence that the pace of economic decline was slowing.
Major stock indexes finished sharply higher with the Dow Jones industrial average .DJI up 2.85 percent, the Standard & Poor's 500 Index .SPX up 3.04 percent, and the Nasdaq Composite Index .IXIC up 3.11 percent.
As stocks climbed, benchmark 10-year notes US10YT=RR tumbled 25/32, their yields rising to 3.23 percent, up 10 basis points on the day.
The 30-year bond US30YT=RR fell nearly two full points, its yield rising to 4.19 percent from 4.08 percent on Friday.
“Stocks being up and talk of a bottom and an economic recovery was just bad news for bonds,” said Cary Leahey, economist at Decision Economics in New York.
In the background, as well, was the realization that the U.S. federal budget deficit and the financing to fund the deficit spending means enormous debt issuance ahead, analysts said.
“Bonds are getting hurt by the tremendous amount of Treasury debt that will be issued over the next couple of years,” Leahey said.
An index showing an improved mood among U.S. home builders matched expectations and fed sentiment that the economy might do less badly in the future. The National Association of Home Builders/Wells Fargo Housing Market Index showed U.S. homebuilder sentiment rose to 16 in May from 14 in April.
On Tuesday, the government will report April housing start figures. A Reuters poll of economists looks for the slightest of upticks in April housing starts to a seasonally adjusted annualized 0.52 million from 0.51 million in March.
The Fed bought Treasuries maturing in August 2019 and February 2023 early in the session. (Editing by Leslie Adler)