June 11 (Bloomberg) -- U.S. stocks rose, sending the Standard & Poor’s 500 Index to a seven-month high, as a drop in Treasury yields eased concern higher borrowing costs will stifle an economic recovery and oil’s rally lifted energy shares.

Schlumberger Ltd. and Chevron Corp. climbed at least 2.3 percent and were among the biggest contributors to the advance as crude topped $73 a barrel for the first time since October. Bank of America Corp. surged 8.3 percent to lead financial stocks higher after Morgan Stanley boosted its profit estimates. Treasury yields retreated as the highest levels of the year attracted buyers to an auction of 30-year bonds.

The S&P 500 added 0.6 percent to 944.89 at 4:09 p.m. in New York, its highest close since Nov. 5. The Dow Jones Industrial Average rose 31.9 points, or 0.4 percent, to 8,770.92. Oil climbed to as high as $73.23 a barrel in New York, while 10-year government bond yields slid to 3.87 percent after reaching 4 percent for the first time since October.

“The recovery is very dependent upon yields staying low,” said Noman Ali, part of a group that manages $14 billion of U.S. equities at MFC Global Investment Management in Toronto. “There are signs that things are improving, or not getting worse.”

Today’s gain erased the Dow average’s 2009 loss on an intraday basis, yet it failed to maintain the year-to-date gain on a closing basis for a fifth straight day. Down 25 percent on March 9, its worst start to a year, the benchmark is the only major U.S. stock gauge yet to turn positive for the year.

VIX Retreats

The benchmark index for U.S. stock options closed at its lowest level since Sept. 12, the last session before the collapse of Lehman Brothers Holdings Inc. The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 1.2 percent to 28.11. Known as Wall Street’s “fear gauge” because it gauges the cost of using options as insurance against declines in the S&P 500, the VIX is down from a record 80.86 in November yet above its 20 average over its 19-year history.

Schlumberger, the world’s largest oilfield-services provider, gained 4.9 percent to $62.18. Chevron, the second- biggest U.S. energy company, added 2.4 percent to $71.90.

Crude oil rose as the International Energy Agency raised its demand forecast and China’s net imports jumped to a 14-month high. China boosted net crude purchases to 3.9 million barrels a day in May. Nouriel Roubini, the New York University professor who predicted the financial crisis, said crude may rise to $100 a barrel next year.

Banks Gain

Bank of America, the largest U.S. lender by assets, jumped 8.3 percent to $12.97 for the steepest advance in the Dow. Morgan Stanley cited higher expected fee income in raising its 2009 and 2010 profit estimates for the company. Keefe, Bruyette & Woods upgraded the shares to “outperform.”

Fifth Third Bancorp and Regions Financial Corp. were upgraded to “buy” from “neutral” at Goldman Sachs Group Inc., which cited the lenders’ “relative value within a generally bearish view” on regional banks. Fifth Third, Ohio’s biggest bank, rose 5.9 percent to $7.77. Regions, based in Alabama, climbed 9.3 percent to $4.37.

Stock benchmarks climbed as the 10-year note’s yield declined after touching the 4 percent level, signifying investor demand for the securities at that level. The yield has risen from 2.06 percent on Dec. 30 amid record sales of government debt securities to finance stimulus measures, and less-dire expectations for the economy.

Better-than-estimated government data on jobless claims and retail sales bolstered confidence the economy is recovering, adding to demand for equities.

‘A Hindrance’

“Both rising rates and rising commodity prices to a point signal recovery in the economy, which is a good thing,” said Walter Todd, co-chief investment officer at Greenwood Capital in Greenwood, South Carolina. Greenwood manages $650 million. “But there’s a level on both where they’re no longer an indicator of recovery but instead become a hindrance.”

Gains in crude are translating into higher retail prices for gasoline, threatening to stymie a recovery in consumer spending. The national average price for a gallon of regular unleaded gasoline has jumped 29 percent since April 28, according to the American Automobile Association. Yesterday it was $2.63, the highest since Oct. 28.

Consumer Concern

Companies that depend on discretionary spending by consumers such as Best Buy Co., the biggest electronics retailer, were laggards today in the rally among the S&P 500’s 10 main industries. Best Buy fell 3.4 percent to $37.23.

Excluding automobiles, retail sales rose 0.5 percent in May after a 0.2 percent drop in April that was smaller than previously estimated, the Commerce Department said. Weekly Labor Department data showed initial unemployment claims fell to 601,000 last week, the fewest since January.

The S&P 500 has rallied 40 percent from its 12-year low in March after the government and Federal Reserve pledged $12.8 trillion to end the first global recession since World War II. The index trades at about 14.9 times the earnings of its companies, near the seven-month high of 15.2 reached in May and below the 19.9 average over the last decade.

Palm Inc. added 12 percent to $13.43. The maker of the Pre phone said Chairman Jon Rubinstein will take over as chief executive officer, putting the developer of the touch-screen device at the helm as competition with Apple Inc. escalates. Bank of America raised its price target on the shares to $16 from $14.

UnitedHealth Group Inc. lost 6.5 percent to $24.05 for the biggest decline in the S&P 500. The largest U.S. insurer by revenue was downgraded to “underperform” from “perform” by Oppenheimer & Co. Inc., which cited margin declines in its Medicare business.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: June 11, 2009 16:28 EDT