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Treasury prices rose based on growing optimism that the

Federal Reserve will lower interest rates, not necessarily at its meeting tomorrow, but in the months ahead. The rally dropped most yields to new lows for the year.

An article in

The Wall Street Journal

suggesting that the Fed may skip a step in the process that could eventually lead it to lower interest rates was the main reason for the fresh optimism. There was no economic news.

"The article provided a bit more fuel for those who feel that a rate cut is imminent," said Kevin Flanagan, fixed-income strategist at

Morgan Stanley Dean Witter

. "This is taking the bonds into loftier territory."

The benchmark 10-year

Treasury note rose 5/32 to 104 14/32, lowering its yield 2.2

basis points to 5.158%, the lowest since April 1999. Shorter-maturity yields also declined to new lows for the year.

The 30-year

Treasury bond fell 7/32 to 111 28/32, raising its yield 1.7 basis points to 5.439%.

At the

Chicago Board of Trade

, the March

Treasury futures contract fell 4/32 to 104 21/32.



reported that the

Federal Open Market Committee, which had been expected to issue a statement declaring the risks to the economy balanced between rising inflation and too-slow growth at tomorrow's meeting, is considering declaring too-slow growth the paramount risk. That would move it one step closer to actually lowering the fed funds rate.

The committee also will consider lowering the

fed funds rate tomorrow, the paper said. But that is less likely to happen.

Even a switch to declaring too-slow growth the greater risk to the economy isn't a sure thing, Flanagan said. He expects the FOMC to go only as far as declaring the risks balanced. Others agree that because there have been signs -- such as the larger-than-expected increase in the core

Consumer Price Index on Friday -- that inflation is accelerating, the Fed should delay lowering rates for at least another month.

The odds that the FOMC will lower the fed funds rate to 6.25% from its current level of 6.5% at tomorrow's meeting rose to 46% from 41% on Friday, as indicated by the prices of

fed funds futures contracts.

Already on an upward swing through the close of last week, bond prices got an "extra boost" from the


article, said Astrid Adolfson, financial economist at

MCM Moneywatch


The rally in Treasuries was all the more significant because blue-chip stocks also rallied. For the better part of this year, rallies in the stock market, though rare, have triggered selling of Treasuries. Rising stock prices make Treasuries less appealing as an alternative investment, and to the extent that they signal investor optimism about the economy, call for higher interest rates, which mean lower bond prices.

That logic had no sway with bond investors today. "As long as the economic backdrop continues to be slow and weak, it does not matter

to the bond market what the stock market does," Flanagan said.

Adolfson agreed that Treasuries are not particularly vulnerable to a stock-market rally in the near term. "

They could be vulnerable to some profit taking, though."

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 112.12 yen, down from 112.59. The euro was worth $0.8935, down from $0.8952. For more on currencies, see


Currencies column.

Crude oil for January delivery at the

New York Mercantile Exchange

rose to $29.76 per barrel from $28.87.


Bridge Commodity Research Bureau Index

rose to 228.50 from 227.41.

Gold for February delivery at the


fell to $272 an ounce from $272.90.