March 18 (Bloomberg) -- Treasuries fell, led by two-year notes, as the Federal Reserve reduced its target rate for a sixth time since September, bolstering expectations the central bank will be able to prevent a meltdown in financial markets.

Yields rose after policy makers cut their main lending rate by three quarters of a percentage point to 2.25 percent. The Fed's statement also said that inflation has been elevated, and some indicators of inflation expectations have risen.

``The whole Treasury market has traded upon fear, said E. Craig Coats Jr., co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York. ``What the Fed did yesterday and followed through on today is relieving a lot of the fear pressure in the marketplace.''

Yields on two-year notes rose 17 basis points, or 0.17 percentage point, to 1.51 percent at 2:40 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The 10-year note's yield rose 8 basis points to 3.38 percent.

The Fed Board of Governors also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.5 percent. Officials reduced the normal 1-point spread over the federal funds rate in August to a half point to ease liquidity constraints. They further narrowed the difference on March 16, in the first weekend emergency move since 1979.

Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented from today's decision, preferring ``less aggressive action.''

Emergency Steps

Bonds dropped earlier after Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. reported smaller-than-estimated declines in first-quarter profit, easing concern credit market losses will widen.

The Fed took emergency steps over the weekend to stave off a financial panic, lowering its rate on direct loans to banks and becoming lender of last resort for Wall Street's biggest dealers in government bonds. It also brokered an agreement for Bear Stearns Cos. to be purchased by JPMorgan Chase & Co.

``It's amazing that the Fed has been so creative and doing what it takes because this could easily have been a disaster,'' said Brant Carter, managing director of fixed-income retail trading for government and agency bonds in Memphis, Tennessee, at Morgan Keegan Inc. ``Not that it isn't at this point, but it could have been much, much more painful.''

Treasuries have returned 5.1 percent in 2008, heading for their best quarter since July through September in 2002, according to a Merrill Lynch & Co. index. Financial institutions worldwide have reported $195 billion in losses and writedowns linked to U.S. subprime mortgages since the start of 2007.

Credit Crisis

The Standard & Poor's 500 Index has dropped 18 percent from an Oct. 9 record. The dollar yesterday reached an all-time low versus the euro and a 12-year low against the yen. Crude oil for April delivery touched a record $111.80 a barrel yesterday. Gold also climbed to $1,032.70 an ounce, the highest ever, as investors sought a cover from losses in the dollar and global equities.

The two-year note's yield has fallen more than 3.75 percentage points since the credit crisis began in June with rising delinquencies on subprime mortgages.

The central bank agreed to support the purchase of Bear Stearns Cos. by JPMorgan Chase by funding as much as $30 billion of Bear Stearns's ``less liquid assets.''

The Fed on March 11 announced it will for the first time lend Treasuries in exchange for debt that includes mortgage- backed securities held by dealers. It holds about $713 billion of Treasuries on its balance sheet.

Before the Fed's announcement, interest-rate futures on the Chicago Board of Trade showed 86 percent odds that the Fed would lower the 3 percent target rate for overnight lending between banks by a full percentage point at today's meeting, compared with zero chance a week ago. The balance of bets was for a cut of 0.75 percentage point. There was a 22 percent chance yesterday that the Fed would cut by 1.25 percentage point.

`Adverse Feedback Loop'

Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. said in separate notes to clients yesterday that the Fed would cut by 1 percentage point.

Central bank officials lowered their projections for economic growth by half a percentage point this year, according to quarterly figures published last month.

Fed Governor Frederic Mishkin said on March 4 that the economy may face an ``adverse feedback loop,'' where tightening credit and a declining economy create a cycle that leads to further deteriorating conditions. The FOMC discussed that possibility during the January meeting, according to its minutes.

Treasury two-year notes rose the most since the Sept. 11, 2001, terrorist attacks on Jan. 22, when the Fed unexpectedly cut the target lending rate by three-quarters of a percentage point in an emergency decision. Two-year notes rose again when the Fed cut the benchmark lending rate by a half-percentage point at its Jan. 30 meeting.

Goldman's and Lehman's first-quarter earnings fell less than analysts had estimated. The fixed-income business of Goldman posted about $1 billion of losses on residential mortgages and securities, as well as a $1 billion loss on high- yield, or leveraged, loans. Earnings at Lehman were depressed by a $1.8 billion writedown caused by the mortgage market slump.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Sandra Hernandez in New York at shernandez4@bloomberg.net

Last Updated: March 18, 2008 14:43 EDT