So much for the trading range. Treasury bonds, which had spent early 1999 in a haze, are getting the spoils from today's de facto devaluation in Brazil. In the wake of the approximately 9% devaluation and the resignation of Brazil's chief central banker,

Gustavo Franco

, the bond market has posted its largest gain in three months.

"I don't know if there's a subtle explanation for this," said

Credit Suisse First Boston

government strategist Larry Dyer.

The benchmark 30-year bond has trimmed its yield by 11 basis points to 5.10%, the lowest yield since Dec. 30. The bond is trading at 102 8/32, up 1 28/32. Earlier, it was up more than 2 points. On a yield basis, the short end of the curve is deriving the greatest benefit from the Brazilian implosion. The two-year note trimmed 22 basis points to trade at 4.48%; the five-year note is yielding 4.49% and the 10-year bond is now yielding 4.67%.

Analysts believe the action taken in Brazil is merely the first leg of a sustained devaluation, which would pave the way for more gains in the haven of the fixed-income market. U.S. stocks were trounced at the opening bell. The

Dow Jones Industrial Average

fell more than 200 points in the first hour of trading, further fueling the interest in Treasury bonds.

The Treasury market had been mired in a range, first from 5% to 5.25%, then more recently between 5.25% and 5.35%, based on expectations for continued strength in the economy, stocks and stable monetary policy. Participants in this directionless market held out one caveat -- a shock to the financial system.

"We've been concerned about the idea that a crisis would once again return internationally," said Dyer. "The risk structure in Treasuries was that you could have lower yields -- the

Consumer Price Index

remains low, and a risk of crisis could lead to flight-to-quality buying."

While this activity today doesn't necessarily translate to another rate cut from the

Federal Reserve

, the expectations of such an event have been raised. The June federal funds futures contract, an indicator of market sentiment regarding monetary policy, is now yielding 4.55%, which translates to an 80% chance of an easing by June. At the beginning of the week all contracts were yielding 4.75%, indicating no chance of a rate cut.

Chicago Fed President

Michael Moskow

stuck to his prepared remarks today, saying that while the economy may slow, the Fed needs to remain vigilant in fighting inflation.

"Based on the futures prices, they're looking for another ease, but not by the February meeting," said Charles Reinhard,

ABN Amro's

market strategist. "Their recent comments seem very balanced."

Two things are unclear -- will this devaluation trigger a spate of similar actions in neighboring countries or other emerging markets, and how will the market react? Well, predicting a crisis is a near-impossible task, but Dyer pointed out that the levels reached last fall -- 3.9% on the two-year note and 4.70% on the long bond -- are less likely to be achieved again.

"In that dislocation, people had portfolio positions that were no longer appropriate for what was happening in the market and they were forced to liquidate," he said. "We're not as likely to get an extreme move in the Treasury market. Hitting those levels takes us into overbought territory."

If you missed it

yesterday, the

Producer Price Index

was released early. The PPI rose 0.4% while the core PPI, which eliminates food and energy prices, was up 1%.

Expectations as reported by

Reuters