Nov. 27 (Bloomberg) -- The benchmark 10-year U.S. Treasury note fell for a fifth week, its longest losing streak since May, on concern foreign investors' demand for U.S. government bonds is waning.

Comments by Federal Reserve Chairman Alan Greenspan in Frankfurt on Nov. 19, suggesting foreign holders of U.S. assets may shift some investments to other currencies, triggered the selling. Declines accelerated yesterday after a report that a Chinese central bank official said his country trimmed holdings of U.S. debt. The official later denied the report.

``Greenspan's comments on foreign demand were strong enough to discourage most bond investors,'' said Christopher Sullivan, chief investment officer in New York at the United Nations Federal Credit Union, with $2 billion in fixed-income assets. ``It would be very risky to be on the wrong side of this trade when even the Fed is alerting the market about a possible slowdown in purchases of Treasuries.''

The 4 1/4 percent note maturing November 2014 fell 9/32 for the week, or $2.81 per $1,000 face amount, to 100 3/32 in New York, according to bond broker Cantor Fitzgerald LP. Its yield increased 4 basis points to 4.24 percent. Ten-year yields rose every week from 3.98 percent in the week ended Oct. 22. A basis point is 0.01 percentage point.

The Bond Market Association, an industry group, recommended an early 2 p.m. trading close yesterday after the observance of the Thanksgiving holiday in the U.S.

`Diminished Appetite'

``Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point,'' Greenspan said at the European Banking Congress in Frankfurt. ``International investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit.''

The current account is a measure of trade, services, tourism and investments. The shortfall was a record $166.2 billion in the second quarter. Foreigners, who finance the gap by investing in U.S. assets, held $1.85 trillion of the $3.8 trillion in marketable U.S. Treasury securities outstanding in September, according to Treasury figures.

China Business News reported yesterday that Yu Yongding said China cut its Treasury holdings. Yu, a monetary policy member, said the report was ``distorted,'' in a statement on the Web site of the Institute of World Economics and Policies of the Chinese Academy of Social Sciences, where he is a director.

Dollar's Effect

``These rumors are leading to tremendous movements in the yields,'' said Kornelius Purps, a fixed-income strategist in Munich at HVB Group, Germany's second-largest bank by assets. ``Speculation that the dollar is going to weaken further means Treasuries are going to weaken further. This takes out all the other fundamental issues of rate hikes, steady growth.''

Stocks rose this week, also damping demand for Treasuries. The Standard & Poor's 500 index advanced for a fourth week in five, gaining 1.2 percent. The index is up 6.1 percent this quarter.

Traders in the U.S. were skeptical about the China Business News report.

``China denied it, so we probably will grind back higher'' for Treasury prices, said Paul Calvetti, head of U.S. Treasury trading at Barclays Capital Inc. in New York.

Greenspan said on Nov. 19 that foreign investors may tire of financing the U.S. current-account deficit and diversify into other currencies or demand higher U.S. interest rates.

``Given the size of the U.S. current-account deficit, a diminished appetite for adding to dollar balances must occur at some point,'' Greenspan said at the European Banking Congress in Frankfurt.

Foreign Holdings

Foreign holdings of Treasuries rose to a record $1.85 trillion at the end of September, up from $1.53 trillion at the end of 2003, according to Treasury Department statistics.

Declines in Treasury notes will accelerate as the dollar falls against the euro, Frederic Pretet, a Paris-based economist at Calyon wrote in a research note on Nov. 26.

The dollar yesterday dropped to a record low of $1.3330 per euro, and to 102.01 yen, its weakest since January 2000. It later rebounded after Yu's denial.

China's holdings of Treasuries rose to a record $174.4 billion at the end of September, making it the second-largest after Japan, according to the most recent figures from the Treasury department. The amount Chinese hold is up from $158 billion at the end of 2003 and $118 billion at the end of 2002.

China's Yuan Peg

China may relax the yuan's decade-old peg to the dollar by April 1 as the government attempts to slow inflation and cool economic growth, analysts at Bank of America Corp. and Merrill Lynch & Co. said. The currency is currently pegged at about 8.3 per dollar.

Any Treasury sales are ``just another sign of potential preparation in China for a currency regime change,'' said Dariusz Kowalczyk, a senior investment strategist in Hong Kong at CFC Securities Ltd. ``It makes sense for them to peg the yuan against the basket of currencies that reflects foreign trade.''

Other traders doubted China made any changes in its Treasury holdings.

``The only thing out there today was the one about China, and that was silly,'' said Scott Gewirtz, co-head of U.S. Treasury trading at Deutsche Bank Securities in New York. ``I don't think they sold anything. We are seeing some steepening trades today in the curve, and that's all.''

`Curve-Steeping' Trades

The Treasury yield curve ``steepens'' when price declines in longer-dated Treasuries, such as 10-year notes, outpace moves in shorter-dated securities, such as two-year notes.

Henry Willmore, an economist in New York at Barclays Capital, a primary dealer, on Nov. 24 raised his forecast for the two-year Treasury note's yield to 4.8 percent at the end of 2005, a level unseen since February 2001. Two-year yields now are a few basis points above 3 percent.

Ten-year notes rose during Asian trading on Friday also on speculation the Bank of Japan would buy them to help slow the yen's gain against the dollar.

Finance Minister Sadakazu Tanigaki said at a regular press conference today Japan will take ``timely and decisive action'' to counter rapid moves in the yen.

The central bank typically buys Treasuries with the dollars it purchases, which helped drive 10-year note yields to the year's low in March. Japan sold 32.9 trillion yen ($321 billion) to buy dollars in the fiscal year ended March 31.

Should Japan sell yen and buy dollars ``it is likely they will buy Treasuries with the money,'' said Ryohei Muramatsu, manager of the currency and treasury group in Tokyo at Commerzbank AG, Germany's third-largest bank by assets.

Russian Shift

Speculation China may be reducing its Treasury holdings followed comments by Russian central bank's First Deputy Chairman Alexei Ulyukayev, who told reporters in Moscow on Nov. 23 it may increase the amount of euros in its reserves.

Central bank Deputy Chairman Konstantin Korishchenko said yesterday Russia will reduce its dollar purchases next year as it shifts to targeting the ruble's value against a basket of currencies instead of the dollar.

``We had Russia, and then this report on China, creating a chorus of countries dumping dollar assets,'' said Tokyo-based Yusuke Fujisawa at Dai-Ichi Kangyo Asset Management, which invests the equivalent of $17 billion. `The dollar's weakness is diminishing appetite for U.S. debt as people look more into the risk of holding dollar assets.''

Indonesia

Indonesia may reduce dollars and U.S. notes in its foreign- exchange reserves should the currency continue to drop, Aslim Tadjuddin, deputy governor for monetary policy at the central bank, said in an interview in Jakarta.

Indonesia had the equivalent of $35.4 billion of net foreign- exchange reserves on Nov. 12, comprising dollars, the euro, yen and other currencies, according to Tadjuddin, who didn't provide specific details.

The U.S. needs to attract about $1.8 billion in capital a day to compensate for its current-account deficit and maintain the dollar's value, according to Bloomberg calculations. The deficit, the widest measure of trade, grew to a record $166.2 billion in the second quarter.

The Fed's holdings of Treasuries for foreign central banks and international accounts rose to a record $1.06 trillion in the week ended Nov. 17, according to figures from the bank. The U.S. had $3.8 trillion in marketable securities outstanding at the end of September.

To contact the reporter on this story: Vivianne Rodrigues in New York at vrodrigues@bloomberg.net

Last Updated: November 27, 2004 10:11 EST