Treasury bond prices took a beating Wednesday as upbeat economic and corporate news put a charge in stocks and created perceptions that the

Fed

might have to cut off the money spigot.

Two-year notes fell 17/32, to 99 28/32, lifting their yield to 3.07%. Five-year notes fell 1 6/32, to 96 23/32, yielding 4.24%. Benchmark 10-year notes were off 1 28/32, to 100 24/32, yielding 4.9% -- their worst one-day decline since March 1996. The long bond shed 2 3/32, to 100 14/32, raising its yield to 5.34%.

"By no stretch of the imagination are these declines minor," said Maryann Hurley, a Treasury market strategist at D.A. Davidson. "These are significant losses in price."

The dramatic selloff was fueled by a rally in stocks, which itself was based on hopes that an economic recovery will come sooner than expected. The

Dow Jones Industrial Average rallied 1.8% to 10,068.8, marking its first close above 10,000 since Sept. 5. The

Nasdaq gained 3.6% to 2033.1, fueled by investor optimism over recent reports from tech heavyweights

Oracle

(ORCL) - Get Report

and

Cisco

(CSCO) - Get Report

.

Oracle gained 11.4% to $15.37 after its chief executive, Larry Ellison, said Tuesday that business has stabilized and is even starting to get a little better. Ellison predicted the recession would end in 2002, at which point, he said, his company could boast up to 50% in operating margins.

Shares of Cisco closed higher by 5% to $21.54, on upbeat comments from its chief executive John Chambers yesterday. At an annual two-day analyst meeting, Chambers said November orders were in line with expectations and that opportunities for the company are on the horizon.

In addition,

Samsung

said it raised chip prices by 10% in December, indicating that prices for DRAM -- the memory chips found in personal computers -- could be stabilizing. The news lifted semiconductor stocks, with the Philadelphia Stock Exchange Semiconductor Index gaining 7.7% today.

In economic news, the National Association of Purchasing Management's index of business activity in the nonmanufacturing sector rose to 51.3 in November from an all-time low of 40.6 in October, the largest one-month gain in the history of the survey. Analysts had been expecting a reading of 43.

"Such a strong number came as a surprise to the Treasury market," said Bill Hornbarger, a bond market strategist at A.G. Edwards, "and it erased gains from earlier in the week." A reading above 50 signals expansion in nonmanufacturing businesses, such as health services and construction.

"The NAPM indexes are indexes of change from one month to the next,

so it's not surprising that, following October's high rate of decrease in activity in the aftermath of Sept. 11, members experienced increased activity in November," said Ralph Kauffman, the survey's coordinator, in a statement.

Some experts said not to rely too heavily on the data. "The problem with the report is that it's new," said Mike Cloherty, a bond market strategist at Credit Suisse First Boston. "We haven't seen how it performs over the business cycle. So using it as an indicator of the business cycle is pretty perilous."

Also pressuring bonds today was news that Russia is going to reduce its oil output by 150,000 barrels a day in January, in response to OPEC's requests for production cuts in order to stabilize oil prices. Russia's prime minister, Mikhail Kasyanov, said he hoped the decision would raise oil prices to $20 to $25 per barrel. The price of crude oil rallied on the news today, stoking fears of inflation among bond investors.

In consideration of today's activity, Treasury market strategists noted an adjustment in expectations for what the

Federal Reserve is going to do next year. "There has been a sharp change in attitude," said Tony Crescenzi, bond market strategist at Miller Tabak. Short-dated maturities indicate interest rates could reach 3.5% by the end of 2002, he said.

While today's market activity is suggestive of an economic recovery, not everyone is convinced the weakness is finished. "Though the data is indicative of a recovery, it's sluggish" said Richard Gilhooly, a bond market strategist at Paribas Capital Markets. On Friday, the Labor Department will release its monthly employment report, which is expected to show further deterioration in the job market.