WASHINGTON -- The Treasury yield curve flattened significantly yesterday as the market grew more convinced that the Federal Reserve will raise short-term interest rates again soon.

Despite reports of stronger than expected retail sales in November and higher producer prices, bonds rallied. Late yesterday, the benchmark 30-year bond was quoted up 2/32 at a price of 96 1/32, pulling the yield down to 7.84%.

The short end fell slightly. Three-month and six-month bills were little changed with yields of 5.94% and 6.70%, respectively. Meanswhile, both two-year and three-year notes lost a little ground, with two-year notes yielding 7.72%.

Spreads between the short and long ends narrowed dramatically. Yesterday, the spread between 30-year and 2-year maturities shrank to 12 basis points, compared to 27 basis points on Monday.

Additionally, both 30-year and five-year maturities ended yesterday yielding 7.84%. (The 10-year note finished yesterday at a 7.82% yield.)

"The main thing are these curve flattening trades taking place," said Mary Dennis, an economist with Merrill Lynch & Co. The market is betting the Fed will raise short-term interest rates by at least another 50 basis points at either its next meeting on Dec. 20 or at the following meeting on Jan. 31 and Feb. 1, analysts said.

Today, the market will have to digest reports on consumer prices and industrial production in November. Inflation is expected to be higher in November, coupled with another gain in production and capacity utilization -- and that's probably bearish news for bonds, analysts warned.

Treasury Market Yields Previous Previous Tuesday Week Month3-Month Bill 5.93 5.98 5.526-Month Bill 6.67 6.47 6.031-Year Bill 7.29 6.95 6.562-Year Note 7.68 7.42 7.083-Year Note 7.78 7.54 7.395-Year Note 7.81 7.65 7.687-Year Note 7.81 7.68 7.7810-Year Note 7.80 7.71 7.9030-Year Bond 7.84 7.83 8.04

Source: Cantor, Fitzgerald / Telerate

Stats

Stock Market: The Dow Jones Industrial Average fell 3.03 points yesterday, to close at 3715.34.

Foreign Exchange: In late New York trading yesterday, the dollar was quoted at 100.32 Japanese yen and 1.5732 German marks.

Commodities: The Commodity Research Bureau's index closed down 0.87 point yesterday, at 229.23.

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