Treasury prices resumed their downward tack today, giving back the gains made in the previous three sessions. With the Fed poised to hike interest rates at its meeting on Tuesday, it was something of a return to fundamentals.

The major economic news of the day -- the April

Producer Price Index -- was slightly better than expected, but that didn't seem to have much of an effect on the market. Perhaps because while lower oil prices in April held prices in check at the wholesale level, oil is back on the warpath, once again approaching the $30-a-barrel level.

Treasury prices were higher in the mid-morning, thanks chiefly to rumors that federal agency securities were in danger of losing their triple-A rating from one of the major rating agencies, as a consequence of changes Congress is considering, that would deprive the agencies (

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

) of some of the federal support they currently enjoy. In general, news that saps demand for agency securities benefits Treasuries as an alternative investment.

But, as those rumors died out, the rally unraveled. By midday, Treasuries were in negative territory, and they never looked back. The benchmark 10-year note ended down 24/32 at 99 26/32, lifting its yield 10.5 basis points to 6.525%. Shorter-maturity issues fared just as badly. The five-year note lost 14/32 to 99 29/32, lifting its yield 10.4 basis points to 6.772%. And the two-year note slid 6/32 to 98 31/23, lifting its yield 10.1 basis points to 6.936%, the highest since March 1995.

The 30-year bond tumbled 28/32 to 100 19/32, lifting its yield 6.1 basis points to 6.206%, the highest since Feb. 17.

At the

Chicago Board of Trade

, the June

Treasury futures contract shed 24/32 to 93 16/32.

"The rally of the last two days was all about short covering," said Mark Mahoney, Treasury market strategist at

UBS Warburg

. "The stock market dropped and everyone was short for the auction. Now we're just reversing that." On Tuesday and Wednesday, the Treasury Department auctioned new five- and 10-year notes. "Stocks and stronger and agency spreads are more well-behaved," Mahoney continued. "The rally off the lows was more counter-trend. Now the market's back to doing what it's supposed to be doing," given the uncertainty about how much the Fed will raise interest rates.

The

Federal Open Market Committee is widely expected to raise the

fed funds rate from 6% to 6.5% on Tuesday, but how far beyond that they will ultimately go is unclear. At the moment, many market participants agree, the consensus is that the funds rate will reach at least 6.75% by mid-year.

Economic Indicators

The PPI dropped 0.3% in April, falling for the first time since February 1999. Economists polled by

Reuters

had forecast it would drop 0.2%, on average.

Energy prices accounted for the decline, dropping 4.1%. Excluding food and energy prices, the PPI rose 0.1%, in line with expectations.

The PPI's year-on-year growth rate dropped from 4.5% to 3.9%. The core PPI's pace inched up to 1.3% from 1.2%, still well below its February 1999 peak of 2.2%.

In other economic news, the

Consumer Sentiment Index rose to a preliminary 110.9 in May from 109.2 in April. It is still below its January peak of 112.

And

business inventories rose 0.3% in March, while sales surged 1.2%. The pace of sales growth -- 9.9% in March -- remains well ahead of the pace of inventory growth -- 5.3%, indicating that production will have to continue at a fast pace to meet demand.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 108.34 yen, down from 108.48. The euro was worth $0.9196, up from $0.9013. For more on currencies, please take a look at

TSC's

Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

traded as high as $30 a barrel and ended at $29.61, the highest since March 17, up from $29.11.

The

Bridge Commodity Research Bureau Index

rose to nearly a two-year high of 220.74 from 220.57.

Gold for June delivery at the

Comex

rose to $276.90 an ounce from $276.50.