Heartened by a steep drop in the price of oil and the retreating

Nasdaq Composite Index

, long-term Treasury prices improved for the sixth consecutive session today, dropping their yields to new lows for the year.

But volume was exceedingly light on the day before the

Federal Open Market Committee's

second meeting of the year, which is universally expected to produce a hike in the

fed funds rate

from 5.75% to 6%.

With no major economic indicators to give the Treasury market direction, just $18.1 billion of securities changed hands, according to tracker

GovPX

. That's 46.4% below average for a Monday over the past month.

Instead, long-term yields were guided by falling commodity prices. Commodity prices have been climbing for much of the last year, breeding worry among bond investors that prices in general will start rising at a faster rate. Long-term yields go up and down with inflation expectations.

The falling Nasdaq Comp also contributed to the long-maturity rally, by erasing some of the outsized gains that Fed Chairman

Alan Greenspan

thinks are fueling economic growth at an unsustainable rate by encouraging too fast a pace of consumer spending.

To the extent that the Fed hopes its interest-rate hikes rein in the stock market, the focus of its concern is "more likely the Nasdaq than the Dow

Jones Industrial Average,"

A.G. Edwards

bond market strategist Bill Hornbarger said.

But while long-maturity issues rallied, the short-maturity ones that reflect investors' near-term expectations about the Fed lost ground, indicating no change in the consensus that fed funds rate hikes (there have been four 25-basis-point moves since June) will keep coming until there is clear evidence that the economy is slowing.

Regarding tomorrow's FOMC meeting, the

fed funds futures

contracts listed on the

Chicago Board of Trade

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were fully expecting a 25-basis-point rate hike, and put the odds of a 50-basis-point hike at 30.2%.

The benchmark 10-year Treasury note ended up 5/32 at 102 10/32, dropping its yield 2.1 basis points to 6.183%, its best close since Dec. 13. The 30-year bond rallied 7/32 to 103 19/32, cutting its yield to 5.990%, the lowest since Sept. 24. But the two-year note fell 2/32, lifting its yield 3.5 basis points to 6.532%.

The split performance of short- and long-term Treasuries drove the inversion of the Treasury yield curve to new extremes. The difference in yield between the two-year note and the 10-year note widened from 29.3 basis points to 34.9, while the difference between the two-year and 30-year yields went from 49.1 basis points to 54.2.

At the Chicago Board of Trade, the June

Treasury futures contract gained 4/32 to 95 11/32.

Economic Indicators

Today's only economic release, the

federal budget

report for February, showed a slightly larger deficit in that month than had been anticipated. Outlays exceeded revenues by $41.7 billion, vs. an average forecast among economists polled by

Reuters

of a $40.3 billion deficit. But the deficit was narrower than the February 1999 deficit of $42.3 billion. Through the first five months of fiscal 2000, the cumulative deficit is $188 million, compared to a cumulative deficit of $26.4 billion during the first five months of fiscal 1999.

Currency and Commodities

The dollar weakened against the yen and the euro. It lately was worth 106.36 yen, up from 106.72 Friday. The euro was worth $0.9728, up from $0.9720. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for April delivery at the

New York Mercantile Exchange

sank 4.7% to $29.43 a barrel from $30.91 on optimism that next week's meeting of

OPEC

oil ministers will produce an agreement to boost output.

Weakness throughout the commodity complex dragged the

Bridge Commodity Research Bureau Index

down 1.8% to 212.99 from 216.88.

However, gold for April delivery at the

Comex

rose to $286.80 an ounce from $285.00.