Yields on two-year notes, more sensitive than longer- maturity debt to Fed rate changes, rose the most in two weeks as traders pared bets the central bank will lower its target rate this year after increasing it 17 times from June 2004 to June 2006. Two-year yields yesterday touched a one-month low.

The gap between two- and 10-year yields narrowed to 16 basis points, the smallest in a week. The differential widened to 22 basis points, the biggest since October 2005, on June 22 as flight from riskier assets fueled demand for short-maturity Treasuries.

The rally was sparked by signs rising defaults on mortgage loans to people with poor or limited credit histories are causing losses for investors in securities backed by pools of debt.

unemployment held close to the lowest in six years. Economists have also raised their estimates for economic growth this quarter after exports jumped, manufacturing rebounded and consumer spending held up in spite of the housing recession.

The Fed's statement played down the potential for housing to slow the economy