The Treasury market -- short-maturity issues in particular -- got a moderate lift from the latest downdraft in stock prices, as investors concluded that erosion of stock-market wealth takes pressure off the

Fed to hike interest rates in the months ahead.

The logic of the move is as follows: If stock prices fall far enough, chastened investors will spend less money. That will slow the economy and prevent the Fed from hiking the

fed funds rate as much as it might otherwise.

Short-dated Treasuries benefit most (their yields drop by the largest amounts) from an improving Fed outlook because the fed funds rate is a short-term interest rate. Long-term yields move more independently.

The recent stock market action won't necessarily keep the

Federal Open Market Committee from hiking the funds rate at its next meeting on June 28,

Merrill Lynch

financial economist Martin Mauro said. But it may reduce the total number of times it raises the rate this year. "It changes the thinking about how many more tightenings are out there," he said.

In

fed funds futures trading at the

Chicago Board of Trade

today, traders downgraded the chances of a 25-basis-point rate hike at the committee's Aug. 22 meeting to 66% from 88%.

At the same time, short-maturity Treasuries often benefit disproportionately from falling stock prices because investors who've cashed out of stocks sometimes invest the proceeds in short-maturity Treasuries, which hold their value more reliably than long-dated Treasuries do.

But today's action was more a function of the changing Fed outlook than it was a panicked flight-to-quality,

Goldman Sachs

money-market economist John Youngdahl said.

Also benefiting Treasuries today, oil fell sharply. Otherwise, there was little market-moving news. The economic calendar was bare, and there are no major reports till

durable goods orders

on Friday.

The benchmark 10-year Treasury note ended up 10/32 at 100 10/32, cutting its yield 4.3 basis points to 6.455%. But the two-year note gained 2/32 to 99 6/32, lowering its yield 4.8 basis points to 6.822%.

The 30-year Treasury bond rose 8/32 to 100 25/32, dropping its yield 4.8 basis points to 6.192%. At the CBOT, the June

Treasury futures contract gained 22/32 to 93 31/32.

Treasuries traded in inverse correlation with stocks all day, peaking when the stock proxies were at their lows, and paring their gains in the final hour as stocks pared their losses.

Among the major stock proxies, the

Nasdaq Composite Index

appears to hold the most sway over the Treasury market, Merrill's Mauro said, because it's "best reflective of where the excesses are in the stock market."

The market's response isn't necessarily the right one over the longer-term though, mused Michael Pianin, a Treasuries trader for

Fuji Securities

. "If you think about it over time," he said, "the Nasdaq had real problems in March and part of April, and that didn't stop the Fed from going 50 basis points in May. And it didn't stop yields going higher even in Treasuries. Stocks are not going to stop the Fed, unless they drop a breathtaking amount."

More economic data showing that the economy continues to grow at a rapid clip will send Treasuries back down, Pianin predicted.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 106.98 yen, down from 107.02. The euro was worth $0.9034, up from $0.8972. For more on currencies, please take a look at

TSC's

Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

fell to $28.61 a barrel from $29.89.

The

Bridge Commodity Research Bureau Index

rose to 223.82 from 223.35.

Gold for June delivery at the

Comex

rose to $276.20 an ounce from $274.60.