Governments securities prices went into orbit yesterday as the Federal Reserve launched its latest salvo of interest rate hikes.

The long-awaited tightening of monetary policy came in the form of a 50 basis point increase in the federal funds rate to 4.25% and a 50 basispoint increase in the discount rate to 3.5%

The Treasury market surged on the action, with the bench-mark 30-year bond jumping almost two points to yield 7.26% on a combination of short recovering and outright buying. Dealers noted broad-based buying in the market with retail interests active.

The Fed's move was largely anticipated by the fixed-income market, and bond investors embraced it as an unequivocal sign of the central bank's resolve in maintaining economic expansion and keeping inflation under wraps.

"The market believes this is policy neutrality, and I think the Fed has restored some of the confidence and calm the market lost with this move," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc.

The aggressive tightening bolstered the Fed's credibility, market observers said, noting that the central bank's announcement included a statement suggesting that monetary policy was nearing neutrality. That, they said, should bring hordes of retail buyers off the sidelines as the threat of future tightening is at least perceived as being greatly reduced.

In the statement, the Fed said yesterday's hike "would substantially remove" the accomodation prevailing in monetary policy last year, suggesting that the central bank may pause for a while after this latest round of rate hikes.

"The Fed's statement is important because it provides a little bit of insight into their thinking," said Michael Moran, chief economist at Daiwa Securities America Inc. "It opens the possibility that they will be holding policy steady for a while."

Long-dated Treasuries rallied immediately after the Fed's announcement as investors moved money out on the yield curve and others came off the sidelines and purchased securities outright.

Fixed-income market observers said less accommodative monetary policy has given longer-term investors more confidence to place bets on government securities from the 10-year note on out the yield curve. This, they said, will probably facilitate a modest reduction in long-term interest rates in coming sessions.

Most important for the long end of the market is that the tightening removes an element of uncertainty from the bond market, enabling investors to return their focus to fundamentals.

"Monetary policy will be moving into the background for the time being," Moran said. "I think people will be looking for June to be a very quite month."

Moran said that after each of the Fed's previous tightening moves this year, it was "understood" that there were more rate hikes on the way, which the market always kept in mind. But after yesterday's tightening move, Moran said the Fed will probably take a breather before boosting short-term rates again.

Still, the Fed's latest interest rate increases do not preclude further tightenings if the pace of U.S. economic expansion remains rapid, bond market analysts said. Yesterday's rate hikes indicate that the Fed has reached a level that it believes is neutral, but does not bar the central bank from acting to rein in credit again if needed.

"The Fed has taken their foot off the accelerator, but they have not applied the brakes," Wesbury said.

Whether or not the Fed raises rates further in the future, said Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp., will depend on the strength of the economic expansion during the current quarter and the second half of the year.

Several U.S. banks announced increases in their prime rates on the heels of the Fed tightening move Tuesday. The prime rate, the interest rate banks use as a base for a wide range of loans to medium-size and small business and to individuals, was raised less than an hour after the Fed's action by three large banks: Citibank, First Chicago Corp., and Bank of New York. Scores of other banks followed suit.

In futures, the June bond contract ended up 1 1/2 points at 105.04.

In the cash markets, the 5 1/2% two-year note was quoted late Tuesday up 6/32 at 99.09-99.10 to yield 5.87%. The 6 1/2% five-year note ended up 23/32 at 99.10-99.12 to yield 6.64%. The 7 1/4% 10-year note was up more than 1 1/4 points at 101.12-101.16 to yield 7.03%, and the 6 1/4% 30-year bond was up almost two points at 87.19-87.23 to yield 7.26%.

The three-month Treasury bill was up one basis point at 4.31%. The six-month bill was down nine basis points at 4.75%, and the year bill was down eight basis points at 5.26%.

Corporate Securities

With the much-awaited Fed tightening finally out of the way, a number of corporate treasuries found the primary market ripe for their offerings.

"The cloud of bearishness that has hovered over the corporate securities market for weeks was replaced by relief that the Fed finally raised rates," one corporate trader said.

A $175 million issue of Mid-American Waste Systems Inc. senior subordinated notes, due Feb. 15, 2003, was priced at par to yield 12.25%.

The issue is noncallable for five years and rated B3 by Moody's Investors Service Inc. and B by Standard & Poor's Corp., and will be sold through underwriters led by Donaldson, Lufkin & Jenrette Securities Corp.

Burlington Northern Inc. issued $150 million of notes due May 15, 1999, said lead manager Morgan Stanley & Co. The notes were given a coupon of 7.40% and priced at par to yield 58 basis points more than comparable Treasuries. The noncallable issue is expected to be rated Baa 1 by Moody's and BBB by Standard & Poor's.

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