The bond market sold off sharply this afternoon after a quiet morning, as the Federal Reserve's anecdotal economic survey, the Beige Book, reported rising wage pressures and price pressures.

The report supports the growing sentiment that the Fed could increase the Fed funds rate by 50 basis points at its May 16 meeting, and that hurt the market this afternoon across the Treasury yield curve.

Lately, the benchmark 10-year Treasury was down 22/32 to 100 23/32, boosting the yield 9.3 basis points to 6.398%. The two-year note was down 2/32 to 99 11/32, yielding 6.732%.

"The afternoon selloff caught a lot of people off guard," said Mike Franzese, intermediate government trader at

Zions First National Bank

in Jersey City, N.J. "Nobody wanted to believe" that costs were increasing.

The market weakened after the 2 p.m. EDT release of the Beige Book, an anecdotal survey of nationwide economic conditions that comes out generally a few weeks before a Fed meeting. This report said that "there were more frequent reports of intensifying wage pressures as shortages of workers persisted in all Districts," the

Beige Book

said. "Increasing input prices were noted in nearly every region."

That wording is a bit more grave than previous Beige Books, which told of wage pressures and tight labor markets, and after last week's

Employment Cost Index

shocked the bond market, traders have been on guard.

"The problem is, this report reinforces the fears that grew out of the ECI," said Tony Crescenzi, chief bond market strategist at

Miller Tabak

. "Wage and cost inflation pressures are in the system now."

The market will add more evidence to the docket tomorrow, with the release of the first-quarter

productivity and unit labor costs report, and Friday, with the release of the April

employment report

.

The Beige Book weakened the short end of the yield curve in particular, which had held in strong after the

Treasury Department's

quarterly refunding announcement this morning. Treasury Undersecretary

Gary Gensler

said today that the Treasury was considering eliminating the one-year Treasury bill due to the government's reduced borrowing needs. He also said there are plans to reduce the size of two-year auctions and eventually reduce the frequency of two-year auctions, which are still held monthly.

This provided a bit of support for the short end of the curve, but the Beige Book took all that way. The reduction in 30-year supply has been a boon for the long bond -- many participants attribute the rapid rally this year in the long bond to supply concerns, rather than to economic concerns.

The Treasury will sell new five- and 10-year notes next Tuesday and Wednesday. A total of $12 billion in five-year notes will be sold, but if the note's yield is between 6.5%-6.624%, the five-year notes will be considered a reopening of the 6.5% 10-year notes sold May 15, 1995. The selloff put the yield on the five-year note out of that range by the end of the day, at 6.66%.

The 10-year note is certain to be a reopening. A total of $8 billion of the 6.5% notes sold in February, maturing in Feb. 2010, will be sold next Wednesday. In addition, buybacks of long-dated securities will now be conducted on a monthly basis, Gensler said.

Factory orders increased 2.2% in March, after a revised unchanged reading in February. On a year-over-year basis, factory orders were up 9.4%, compared with just a 4.8% year-over-year rate in March 1999.

The

National Association of Purchasing Management's

non-manufacturing index, a survey of the service sector nationwide, rose to 65 in April from 64 in March. The index is not widely followed, as the data are not yet seasonally adjusted.

Currency and Commodities

The dollar rose against both the yen and euro. It lately was worth 109.08 yen, up from 108.46. The euro was worth $0.8951, down from $0.9084. For more on currencies, see TSC's

Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

fell to $26.75 a barrel from $26.89.

The

Bridge Commodity Research Bureau Index

fell to 215.53 from 216.85.

Gold for June delivery at the

Comex

rose to $279 an ounce from $277 yesterday.