The Treasury market became a safe haven for fleeing stock investors, who had a hard time dealing with the potent combination of profit warnings and the latest signs of softness in the economy. Market watchers said the growing conviction the

Federal Reserve will keep reducing interest rates helped fuel today's strength in Treasuries.

Lately, the two-year note gained 2/32 to 100 15/32, lowering the yield, which moves in opposition to price, to 3.998%. The last time the two-year yield moved under 4% was in October 1998, during the height of the global financial crisis. The two-year tested the 4% level in both April and May without pushing through. On the longer end of the market, the 10-year benchmark note rose 13/32 to 98 12/32, moving the yield down to 5.215%. The 30-year bond climbed 14/32 to 96 10/32, yielding 5.631%.

"You've seen a bit of a move into bonds ahead of the Fed meeting, and with the recent weakness in stocks, there may be a slight flight-to-quality play involved," said Mike Hurley, technical analyst at

Wit Soundview

.

Chris Malone, a bond trader at

Zions First National Bank

, agreed that the buying in bonds was triggered by the

recent selloff in equities. He also said today's

Producer Price Index was "deflationary" and therefore "good for bonds." Longer-dated securities are particularly sensitive to inflation as higher prices erode the real value of fixed-income investments.

Government data released this morning indicated that wholesale prices rose just 0.2% in May, better than the 0.3% increase economists expected, and only 0.1%, excluding volatile food and energy items. Economists were expecting a 0.1% increase. Also out today,

initial jobless claims fell 12,000 to 428,000 in the week ended June 9.

Despite the decline, the four-week moving average rose to 424,500, its highest level since August 1992, underscoring the ongoing softness in the economy as companies cut costs in tandem with shrinking profits.

Indeed, today's PPI report bolsters

Alan Greenspan's sanguine view of inflation. The Fed chairman has downplayed the threat of rising prices in his latest speeches, though there are those who believe inflation

could still be a problem.

Astrid Adolfson, financial economist at

MCM Moneywatch

, said today's PPI figures "basically show a muted inflation trend" and leave room for Greenspan and his team of central bankers to keep easing interest rates.

According to July's

fed funds futures contract, the market's expectations for the Fed to cut interest rates increased after today's economic data. The July contract is now pricing in a 23% chance of a 50 basis-point cut when the Fed next meets on June 26-27, up from a 14% chance at Wednesday's close.

"We would go with a little bigger than a 25 basis-point cut," said Adolfson, citing information from yesterday's

beige book report, a compilation of findings used by the Fed to gauge the health of the economy.

"The beige book was so depressing and showed the economy's unchanged from a borderline recession," Adolfson said. "That's what the Fed is going to concentrate on. They have to hold the slide and the way to hold the slide is to cut rates."