Error.

Updated April 21, 2008 12:01 a.m. ET

IF SOMETHING CAN’T GO ON FOREVER, it won’t, the late economist Herbert Stein famously said.

Treasury yields surged last week amid a growing consensus that the worst of the credit crisis may have passed. And that, the reasoning went, will keep the Federal Reserve from slashing its key interest rates much further, perhaps only another quarter point next week.

Various central-bank officials also warned about the dangers of worsening inflation as commodity prices soared, making them less inclined to add substantially to the large cuts they’ve already put in place.

And, further bolstered by the positive reaction to quarterly earnings reports last week, the dollar bounced off its record low levels against the euro. The prospect of this better news also would make the monetary authorities less likely to send their federal-funds target rate significantly below the current 2.25%.

In this space last week. it was noted that the fed-funds futures market was just about evenly split between a quarter-point trim, to 2%, or a half-point, to 1.75%, being decided at the April 29-30 meeting of the Federal Open Market Committee. At Friday’s close, however, May fed-funds futures were just barely predicting a quarter-point cut next week, with nil chance of any more. And the July contract was putting up three-to-one odds against any further reduction when the policy-setting panel meets in late June.

That is but one indication of the easing of stresses in the financial system in the month since the Fed institutionalized its lending to non-bank institutions such as broker-dealers. The central bank’s latest data show its daily average lending to banks was reduced by nearly a quarter, or $2.3 billion, to $7.8 billion in the week ended Wednesday, while its lending to primary dealers dropped by a similar proportion, or $7.8 billion, to $24.8 billion.

The Fed did increase its loans of securities to dealers of more than one day by a third, or $32.7 billion to $129.1 billion. This doesn’t add reserves to the banking system but gives dealers Treasuries in exchange for less-liquid securities.

But distress persists in the London money market for dollar interbank loans. Libor — the London interbank offered rate that serves as a benchmark for short-term borrowing costs for multinational corporations and American homeowners — moved sharply higher last week after the Wall Street Journal reported some banks may not be owning up to how much they had to pay for money. (Libor is set by surveying the rates paid by major banks in London, but some banks appeared to understate their rates.)

Morgan Stanley Treasury market analyst George Goncalves noted in the data another sharp rise in the Fed’s foreign exchange swaps with foreign central banks, which provide its European counterparts with dollars to lend to their banks. (As with UBS, many have been caught in the subprime meltdown.)

But even as corporations took advantage of the improved credit markets, bringing a hefty $30 billion in new issues to market last week, the Treasuries sold off sharply. That was especially acute among short maturities, which had to adjust to the prospect of only one more 25-basis-point cut by the Fed. The two-year-note yield, a sensitive indicator of expectations of monetary policy, rose a huge 39 basis points on the week to 2.13%.

Stock guys, you buy this round.