Most Treasury prices collapsed today as traders took profits on bets that yesterday's interest-rate hike by the Fed would lead to a larger difference between short- and long-term interest rates, and as the Treasury Department announced a smaller-than-expected buyback operation for tomorrow. There were no major economic releases, and no other market-moving events.

The benchmark 10-year Treasury note ended down 15/32 at 100 2/32, lifting its yield 6.3 basis points to 6.487%. The 30-year bond was also hit hard, falling a full point to 100 28/32, raising its yield 7.2 basis points to 6.184%. But shorter-maturity issues fared better. The five-year note lost 3/32 to 100, hiking its yield 2.6 basis points to 6.750%. And the two-year note shed 1/32 to 99, lifting its yield 2.2 basis points to 6.929%.

At the

Chicago Board of Trade

, the June

Treasury futures contract fell 18/32 to 93 31/32.

Fundamentally, today's trade was a more thoughtful reaction to yesterday's rate action, in which the Fed hiked the

fed funds rate to 6.5% from 6%, market analysts said. It was the sixth rate hike since June, but the first one larger than 25 basis points in five years. And the Fed's

statement announcing the action hinted strongly at additional rate increases down the road.

"There is absolutely no doubt that the downturn in fixed-income securities prices is a delayed reaction to the Fed's more aggressive approach to monetary policy restraint," said Bill Sullivan, money-market economist at

Morgan Stanley Dean Witter

. The Fed's statement was "almost an acknowledgment that they are behind the inflation curve," and it suggests not only that there will be additional rate hikes, but that there will be additional


rate hikes like yesterday's, Sullivan said. The Treasury market didn't price in that contingency yesterday, he said.

Why not? Sullivan thinks the Fed's statement contained subtleties that took some time to be mined. Specifically, its use of the phrase: "continued pressure on resources." It harks back to the

statement the Fed made following its Nov. 16, 1999, meeting, in which it spelled out that it wanted to see the

pool of available workers stop shrinking. It hasn't yet.

"The euphemism for the job markets is the word resources," Sullivan said. The Fed's focus "remains on the job market first and foremost." By contrast, evidence released over the last week that inflation remains in check and that consumer spending is moderating "played no role in the

Fed's decision-making process."

However, today's trade also was strongly technical, even Sullivan conceded.

Yesterday, many traders profited from long positions in long-maturity Treasuries, paired with short positions in short-maturity ones. This is a popular trade for a Fed rate hike, because short interest rates typically move up in synch with the fed funds rate, while long rates move lower, factoring in lower inflation expectations as a result of the Fed's inflation-fighting move. Today, some took profits on the trade, unwinding it by selling the long-term issues and buying back the short-term ones.

Holly Liss, Treasury market strategist for

Fuji Futures

, said she "heard reports of a large curve trade being taken off" in the afternoon, in which the trader was selling 30-year bonds and buying five-year notes.

The fact that the market closed off its lows was positive, Liss said. But she said the market is "still pretty weak." The June futures contract fell 7 points from early April to early May, "and has only been able to rally back two. It's getting sold every time it goes higher." But, Liss added, the Treasury market historically has done well in the period just ahead, late May and early June.

Also contributing to the selloff in long-dated Treasuries was the Treasury Department's announcement that tomorrow's buyback of Treasury securities will target $2 billion of 30-year bonds issued between February 1985 and August 1989. A trader at a primary dealer firm said dealers were expecting not only a larger quantity -- $3 billion -- but a larger selection of securities, including bonds issued through 1995.

A final factor in today's trade, the trader said, involved a sharp rise in the cost of financing a short position in short-dated Treasuries. For those in the know, the repo rates on the two- and five-year notes fell sharply, the trader said. Accordingly, it became very expensive to carry the curve trade described above, encouraging traders to unwind it.

That's assuming they had the stomach for it fundamentally. "If the market continues to exhibit weakness and it's still possible the Fed's going to tighten down the road," the trader said, "demand for longer securities is going to diminish. That makes if difficult for those involved in curve trades to hold their positions."

Economic Indicators

The weekly

Mortgage Applications Survey detected a slight increase in refinancing activity and a slight decrease in new mortgage activity. The Refinancing Index rose to 340.6 from a revised 331.3 last week, while the Purchase Index fell to 304.6 from a revised 322.4 last week.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 109.28 yen, down from 109.63. The euro was worth $0.8945, down from $0.9002. For more on currencies, please take a look at


Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

retreated to $29.32 a barrel from $29.73.


Bridge Commodity Research Bureau Index

fell to 220.66 from 221.15.

Gold for June delivery at the


fell to $273.80 an ounce from $276.20.