Interest rates rose on Tuesday as a surge in commodity prices pounded government securities.

The increase was particularly sharp on the short end, amid rumors that Federal Reserve policymakers had voted to tighten credit to stop the price rises.

The bond-equivalent yield on one-year Treasury bills rose to 3.40% from 3.31% last Friday.

The yield on the two-year note rose to 4.01% from 3.91%. The yield on the 30-year Treasury bond went up to 6.68% from 6.67% and that on the 10-year note rose to 5.79% from 5.74%.

The bond market initially opened on a strong note, propelled by Japanese buying on last Friday's worse-than-expected employment report for June.

But there was little follow-through demand for Treasuries in the United States.

"The bond market lost some support because of the sharp rise in commodity prices," said William Sullivan, money market economist for Dean Witter Reynolds Inc.

Driven by weather-related increases in soybean and other grain prices, the Commodity Research Bureau's index shot up 5.29 points, or 2.5%, to 217.30. The index measures 21 commodity futures prices.

Gold Rallies

But bad weather in the Midwest was not the only reason for the rise in the index. The price of gold surged $6.80 to $393.50 on the New York Commodity Exchange.

The rise in prices came at an inopportune time for economists and others hoping for a change in Federal Reserve policy.

The Federal Open Market Committee is scheduled today to continue its two-day meeting on monetary policy. On the heels of last week's grim employment news, the panel was widely expected to switch from the protightening stance adopted in May to a neutral stance.

"My inclination is that Alan Greenspan would like to have a neutral policy," said Astrid Adolfson, an economist at MCM MoneyWatch. "But the rise in commodity prices makes that difficult."

Stocks were hammered by the interest rate rises. The Dow Jones industrial average lost 34.04 points to 3,449.93.

But the rumors of a Fed tightening helped the dollar. It finished at 1.7042 German marks and 108.80 yen, up from 1.6965 marks and 108.58 yen on Friday.

At its regular weekly auction, the Treasury sold a total of $24 billion of three- and six-month bills. The average rates were 3.01% and 3.10%, respectively, down from 3.05% and 3.14% the week before.

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