Where'd the money go? Mostly into the Treasury market.

As stocks got sold more or less indiscriminately, investors stuffed their money into the Treasury market, particularly into the shortest-maturity instruments, the most liquid part of the market.

At the same time, traders of

fed funds futures contracts at the

Chicago Board of Trade

downgraded to nil the chance that the

Fed will hike the interest rate by more than 25 basis points at its next meeting on May 16. At yesterday's close, the May fed funds contract was discounting a 40% chance that the Fed would hike the rate by 50 basis points for the first time since 1995.

At the height of the stock selloff, shortly after 1 p.m. EDT, the benchmark 10-year Treasury note was up nearly two points, and market participants were describing the action as reminiscent of the fall of 1998. In that episode, money surged into Treasuries after Russia defaulted on some of its bonds.

But while demand for Treasuries approached levels last seen in the fall of 1998, the profile of the situation was entirely different. In the fall of 1998, the entire financial system was perceived to be at risk because of excessive leverage in the fixed-income markets. That is, banks and brokerage houses were in trouble because they had lent investors too much money to invest in risky bonds, and everyone suddenly wanted out of risky bonds.

Today (and yesterday), the crisis was largely limited to the stock market. Risky bonds certainly haven't performed well. But they didn't experience panicked selling either, as they did in the fall of 1998.

"The leverage in the system is in the equity markets, not in the fixed-income markets," which are "much sounder than they were before," said Bill Cunningham, director of corporate bond strategy for

Chase Securities

.

Selling of stocks often lifts bond prices, for a variety of overlapping reasons. First, investors selling stocks may buy bonds as an alternative investment. Second, bonds hold their value more reliably than stocks do, so investors buy them when they think stock prices could drop even further. Third, falling stock prices are interpreted as a sign that economic growth is on the verge of slowing. When economic growth slows, bonds are likely to outperform stocks.

Today's action was motivated more by the first two considerations than the third, market analysts say. The proof is in the outperformance of the shortest-maturity issues. While the longest-maturity Treasury shed 15 basis points of yield at its high of the day, the shortest-maturity one shed about 32 basis points.

Money that's simply looking for a home, rather than making a macroeconomic bet, will tend to flow into the short-maturity sector of the Treasury market, lowering yields there by the largest amounts. That's because short-maturity Treasuries are the least volatile and most liquid. But long-term issues should outperform short-term ones in the event of an economic slowdown.

"When people sell equities, they go to the short end of the yield curve,"

Bear Stearns

Treasury market strategist Avram Altaras said.

But the fact that fed funds futures traders downgraded the likelihood of a 50-basis-point rate hike indicates that at least some of today's demand for Treasuries reflected a reassessment of the economic outlook.

"Both

sets of factors were operative without a doubt," said Bill Sullivan, chief money-market economist at

Morgan Stanley Dean Witter

. "The first wave was mainly flight to quality, flight to liquidity. When the

stock market slipped to its intraday lows, then I think another wave of Treasury buying kicked in, because it became apparent that these types of declines, if they persist, would erode the equity wealth effect that has been supporting the economy."

At the Treasury market's early afternoon highs today, the 10-year note was up 1 17/32, dropping its yield 24.1 basis points to 5.72%, a level it hasn't closed below since May 28, 1999.

The five-year note rose as much as 1 9/32, dropping its yield 30.8 basis points to 5.96%, a level it hasn't closed below since Nov. 16.

The two-year note gained as much as 19/32, dropping its yield 32.1 basis points to 6.09%, a level it hasn't closed below since Dec. 15.

And the 30-year Treasury bond was up 2 11/32 at its high, dropping its yield 15.6 basis points to 5.66%, the lowest since May 3, 1999.

But the major stock proxies ended well off their worst levels of the day, and the 10-year note finished up just 13/32 at 104 11/32, dropping its yield 5.4 basis points to 5.911%, its best close since Sept. 28. The five-year note gained 11/32 at 98 24/32, dropping its yield 8.7 basis points to 6.181%, its its best since Dec. 15. The two-year note was 3/32 higher at 100 8/32, lowering its yield 5.1 basis points to 6.363%, the lowest since Jan. 10. And the 30-year bond had gained 15/32 to 106 21/32, setting its yield 3.2 basis points lower at 5.780%, the best since May 5.

At the

Chicago Board of Trade

, the June

Treasury futures contract gained 28/32 to 98 22/32.

Economic Indicators

In today's economic news (which had no market impact), the

leading economic indicators index fell 0.3% in January, a tenth more than expected. It was the index's biggest decline since January 1996. Of the 10 indicators that go into the index, only two made positive contributions -- manufacturers' new orders for consumer goods and materials, and the average manufacturing workweek.

Meanwhile, the two weekly retail sales reports showed continuing weakness in the last week of March. The

BTM/Schroder Weekly Chain Store Sales Index fell 1.4%, its biggest drop since last May. The year-on-year pace dropped to -2.0%, a multiyear low. And the

Redbook Retail Average fell 0.3% in March from February. Year-on-year, it was up a scant 0.8% in March.

Currency and Commodities

The dollar gained against the yen and fell against the euro. It lately was worth 104.94 yen, up from 104.87. The euro was worth $0.9616, up from $0.9548. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for May delivery at the

New York Mercantile Exchange

fell to $25.45 a barrel, nearly a three-month low, from $26.43

The

Bridge Commodity Research Bureau Index

fell to 211.37 from 212.48.

Gold for June delivery at the

Comex

rose to $286.6 an ounce from $280.4.