Updated from 9:09 a.m. EDT

Lehman Brothers

(LEH)

posted a 39% gain in second-quarter earnings, as the Wall Street firm showed few signs its bond business is falling off.

In the quarter, Lehman earned $609 million, or $2.01 a share, compared with $437 million, or $1.67 a share, a year ago. The securities firm's quarterly earnings exceeded the Thomson First Call consensus estimate of $1.91 a share.

Net revenue came in at $2.93 billion, up from $2.29 billion a year ago, and above analyst estimates. Lehman registered across-the-board gains in revenue from investment banking work, trading and commission on stock trades.

Lehman is the first of several big Wall Street firms to report earnings over the next two weeks, with

Bear Stearns

(BSC)

set to report on Wednesday.

For some time now, analysts and market watchers have predicted that the sharp rise in long-term interest rates would take a big bite out of the revenue Wall Street firms generate from selling and trading bonds. But at Lehman, traditionally a bond-trading powerhouse, there was no sign of any significant slowdown in either bond trading or bond underwriting.

Trading revenue in the firm's capital markets division rose 12% from a year ago to $1.95 billion, with bond trading accounting for 73% of that sum. The remaining trading revenue came from stock trades for the firm's own account and its customers.

Fees from debt underwriting were flat compared with a year ago at $256 million. But fees from stock offerings nearly doubled to $142 million.

Lehman also benefited from a rebound in the corporate deal-making market. Fees for advising on corporate mergers, which are booked only after a deal is completed, rose 59% to $148 million.

"All of our businesses and regions contributed strongly to our performance," said Lehman Chairman and Chief Executive Richard Fuld, in a press release announcing the firm's earnings.

Overall, Lehman's earnings were the second-best in the firm's history. The only better three-month period for the firm was the first quarter of this year, when Lehman earned $670 million, or $2.21 a share.

Shares of Lehman were trading 8 cents higher to $76.17.

Wall Street analysts found few negatives in Lehman's report. UBS analyst Glenn Schorr, in a research note, called the quarter a good one with "no surprises."

With interest rates expected to rise even higher for the rest of the year, investors will be paying close attention to what Lehman and other Wall Street executives have to say about the outlook for the remainder of the year. Brokerage investors remain worried that a sharp rise in rates will eventually erode the earnings strength Wall Street firms have shown for the past 18 months.

But a Lehman executive, during a conference call with analyst, downplayed the risk posed by rising interest rates. David Goldfarb, Lehman's chief financial officer, says the firm is optimistic about the future because it expects the economic recovery to strengthen.

Economists at Lehman expect the Federal Reserve to begin raising rates when it meets on June 30 by nudging the fed funds lending rate up a quarter percentage point to 1.25%. By year's end, Lehman expects the Fed to push interest rate it charges banks up to 2%. Goldfarb says that's still low by historic standards.

While Goldfarb says the current market for corporate deals has been slowed by concern over rising interest rates, soaring oil prices and the threat of terrorism, he expects that attitude to change. He says "companies are still looking to grow."

Indeed, Lehman itself is growing. In the quarter, the firm added 1,100 employees, another indication that Wall Street is once again creating jobs, after slashing staff during the bear market.