Bonds took a savage beating when today's

Consumer Price Index

rose 0.7%, completely freaking out the entire market. Just as the market temporarily put away its troubles and its strife yesterday, today's reports have the market cowering before Tuesday's

Fed

meeting.

"It's remarkably ugly today -- the fact that the CPI was probably fundamentally not as bad as the release appears doesn't seem to matter," said Jim Kochan, chief bond market strategist at

Robert W. Baird

. "Nobody wants to own fixed-income securities here."

A bit of buying in the afternoon lifted bonds off their worst levels of the day, but net-net, today stunk. The yield on the 30-year Treasury bond rose 17 basis points to 5.92%, its highest closing yield since May 18. The price fell 2 8/32 to 90 22/32.

Until today, most on the Street would have bet against a change in bias by the

Federal Open Market Committee

. So much for that. Adoption of a tightening bias (basically a strongly worded statement warning the market that the FOMC is more likely to raise rates than lower them at the next meeting) indicates the Fed is concerned about rising inflation.

The CPI rose 0.7% in April. A 6.1% rise in energy prices was a big part of this rise, but several components of the core CPI, which excludes volatile food and energy prices, was also much worse than expected. The core CPI rose 0.4%, propelled by a 0.4% rise in housing, a 1.5% rise in apparel, and a 0.4% rise in medical costs.

Henry Willmore, senior economist at

Barclays Capital

, said the recent changes the

Labor Department

has made to better reflect purchasing habits may have added a degree of volatility to the monthly CPI reports, making it more important than ever to examine the moving averages. The technical changes made were intended to slow the rise in the overall CPI. The six-month average rate of increase in the core rate of CPI is 2.2%, the same as the average rate for the previous six months, Willmore said.

"The shift was supposed to slow the CPI 0.2% this year," Willmore added. "If you take that into account, it means the CPI was accelerating by that much. The six-month trend seems to indicate a slight acceleration in the core CPI. I think it will be enough to get the Fed to move to a tightening bias next week."

The agita caused by the CPI might not have loomed so largely if there wasn't a Fed meeting Tuesday to make everybody nervous. The Fed might wait for additional evidence of rising inflation before adopting an official bias in favor of higher interest rates.

But traders weren't taking any chances today. Especially after the

industrial production

reports rubbed salt in the wound already created by the CPI. Industrial production, a key manufacturing report, rose 0.6% in April, two-tenths more then expected.

Capacity utilization

rose to 80.6% from 80.2%.

Early in the afternoon, the market started to inch its way back as the

Dow

and other major equity proxies continued to slide, but the few buyers were beaten back by more selling.

"We continue to be negative over here," said one futures trader at a primary dealer in New York. "The bear has the upper hand and we could go lower."

The market's been ruthlessly negative during the last two weeks. A good part of that is the growing belief the Fed will hike rates next week, or at least change to a tightening bias. Fed Chairman

Alan Greenspan

put a scare into the entire market last Thursday with a speech dwelling on the tight labor market, as well as referring to last year's low oil prices as a "one-off" event.

Perversely, a shift to a tightening bias might be a relief, because it shows the Fed is concerned about inflation. The swift rise in yields seems to indicate that the market is already comfortable with a tightening directive. The two-year note, which best reflects the cash market's thinking about the direction of inflation rates, closed today at 5.30%, 55 basis points above the 4.75% fed funds rate.

"If the Fed shifted its bias I think it would be mildly bullish news. The 'fear of Fed' is pressing the market," the trader said. "The economic indicators and anecdotal information is pointing toward a Fed tightening. Once the Fed starts showing its hands the market will settle."