The long bond rallied yesterday as commodity prices fell, but short-term securities ended with losses amid talk the Federal Reserve may tighten monetary policy.,

Late yesterday, short-term notes were off about 1/8 point, while the 30-year bond was up 1/2 to yield 6.99%.

Traders said the possibility that the Fed will boost short-term rates to rein in inflation dominated yesterday's activity.

The Wall Street Journal reported yesterday that "people familiar with the Fed's deliberations" said the Federal Open Market Committee voted last week to keep policy steady, but to lean toward higher interest rates.

Such a vote would allow Federal Reserve Chairman Alan Greenspan to raise the fed funds target in the weeks ahead without an additional vote by Fed Policymakers if economic developments seemed to warrant such a move. The Fed is currently targeting a 3% funds rate.

There has been speculation about a possible Fed tightening since mid-May, when the April consumer and producer price reports showed big increases, but the Journal article is the most authoritative source so far to Say that Fed officials have adopted an asymmetrical directive. Yesterday's report followed Friday's release of the minutes from the previous FOMC meeting, which show two members of the committee already favored raising short-term rates back in March.

Many economists still doubt the Fed will tighten any time soon because the economy is still expanding only slowly.

Prices began to fall in overseas trading as the market got wind of the Journal article, with the short end posting the biggest losses.

The long bond declined along with the rest of the market in Tokyo, but the 30-year retraced those losses early in the New York session and pushed higher around midday in response to lower gold and commodity prices.

The knee-jerk reaction was to sell off the entire curve." said Kevin Flanagan, an economist at Dean Witter Reynolds Inc. "It wasn't until you started seeing the declines in gold and the CRB hat we started to see some buying interest."

The Commodity Research Bureau index closed 2.28 points lower yesterday, at 209.28, and Comex gold for June delivery dropped $3.70 an ounce to close at $374.20.

A bond salesman said that once the rally started at the long end, bond prices were also bolstered by the "rational" viewpoint that a Fed tightening would be good for bonds because it would limit inflation and slow economic growth.

But Frederick Leiner, a market strategist at Continental Illinois National Bank & Trust Co., said he would be wary of buying bonds immediately based on that line of thinking.

"My memory is that when the Fed first starts to tighten, the bond market does not perform well," Leiner said. "Eventually the bond market becomes convinced that Fed tightening will work, and the bond starts to do better."

Short-term note and bill prices hovered near their lows all through yesterday's session. In addition to the worries about a less accommodative Fed policy, the short end also faces a quantity of new securities to be auctioned this week.

The Treasury will sell $15.75 billion of two-year notes today, which is $500 million more than it sold last month, and $11 billion of five-year notes tomorrow.

Given the talk about a tightening, "there will be hesitation to buy" at the auctions, a note trader said.

A coupon trader said it was possible that banks and hedge funds may stay away from the note sales. Those accounts have been buying short-term notes to garner the spread between the notes' yield and the Fed funds rate, but the profits from that trade will evaporate if the Fed tightens soon, the trader said.

But Flanagan said the recent backup in short-term rates might result in smoother auctions.

"It might have cost the government and the taxpayers money, but the fact that rates did move up could generate some cash off the sidelines" he said.

Traders also say that big short positions have been set up in the two note issues, which should ensure decent demand.

Today's economic numbers are not expected to have much impact on Treasury prices.

The consensus forecast calls for a decline in May consumer confidence, to 64.9%, and a 6.6 million sales pace for cars in mid-May, which would be up from the 6.4 million rate during early May.

Consumer confidence has been a key number since the recovery began, but in recent weeks the bond market's focus has shifted from indicators of consumer demand to the inflation reports.

"The market's going to hone in on what the Fed's honing in on," the note trader said.

The June bond futures contract closed 17/32 higher at 110 9/32.

In the cash market, the 7 1/8% 30-year bond was 1/2 higher, at 101 16/32-101 18/32 to yield 6.99%.

The 6 1/4% 10-year note 1/32, to 100 18/32-100 20/32, to yield 6.16%.

The three-year 41/4% note was down 5/32, at 99-99 2/32, to yield 4.59%.

Rates on Treasury bills were higher, with the three-month bill up four basis points at 3.05%, the six-month bill up six basis points at 3.19%. and the year bill four basis points higher at 3.36%.Treasury Market Yields prev. Prev. Monday Week Month3-Month Bill 3.09 3.05 2.936-Month Bill 3.26 3.18 3.041- Year Bill 3.47 3.37 3.192-Year Note 4.18 4.00 3.753-You Note 4.59 4.43 4.155-Year Note 6.35 6.23 5.087-Year Note 5.79 5.09 5.5310-Year Note 6.16 6.04 5.9430-Year Bond 6.99 6.96 6.82Source: Cantor, Fitzgerald/Telerate

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