May 12 (Bloomberg) -- U.S. Treasuries fell, pushing the 10- year note's yield to 5.2 percent for the first time since May 2002, after a government report showing prices for imports rose more than forecast added to concern about faster inflation.

Treasuries slumped for a third straight week amid a drop in the dollar and rising commodity prices. The Federal Reserve on May 10 boosted its target interest rate to 5 percent and said ``further policy firming may yet be needed to address inflation risks.'' Inflation erodes the purchasing power of bond interest payments and principal.

``Inflation is certainly the main worry for investors right now,'' said Richard Volpe, head of U.S. government bond trading at Bear Stearns & Co. in New York. ``That's leading to a complete lack of sponsorship'' for long-maturity debt, he said.

The yield on the benchmark 10-year note, which was sold yesterday by the government at a yield of 5.14 percent, rose 8 basis points at 5:35 p.m. in New York. Yields move inversely to prices. The price of the 5 1/8 percent note due in May 2016 fell about 1/2, or $5 per $1,000 face amount, to 99 15/32.

Ten-year notes yielded 5.10 percent on May 5 and have fallen every week but one since the end of March. Treasuries maturing in 10 years or longer have lost 6.5 percent this year, compared with a gain of 4.25 percent at this point in 2005, according to Merrill Lynch & Co. index data.

The dollar is at a one-year low against the euro, and the lowest since September against the yen. A falling dollar makes the prices of imports more expensive and erodes returns on U.S. debt for foreign investors, who own half the Treasury market. Taking the currency's move into account longer-maturity Treasuries have produced losses of 14.4 percent for a euro-based investor and 12.5 percent for a yen-based investor this year.

Imports

Import prices rose 2.1 percent in April, the most since September, the Commerce Department said. The median forecast of economists surveyed by Bloomberg was 1.2 percent.

The increase reflected a surge in oil and metals. Crude oil futures are up almost 50 percent in the past year and traded at a record $75.35 a barrel last month. Import prices excluding all fuels rose 0.1 percent. Gold reached a 26-year high, and copper and aluminum futures rose to records today.

``The fact that import prices are high is now adding to concerns about inflation,'' said Amitabh Arora, head of interest-rate strategy at Lehman Brothers Inc. in New York. ``Until the Fed commits to the market that it will keep policy very tight, even at the cost of hurting growth, the long end will stay under pressure,'' he said of longer-maturity debt.

Fed Chairman Ben S. Bernanke, in congressional testimony on April 27, said the central bank ``at some point in the future'' may decide not to raise rates to monitor how the economy is coping with the 16 straight rate increases since June 2004.

`Second-Guessing'

Economists forecast slower economic growth in the second half of the year on expectations the rising cost of variable- rate mortgages will lead to a slowdown in consumer spending, according to a Bloomberg survey from April 28 to May 8.

Interest-rate futures show traders are pricing in a 42 percent chance of another Fed increase at the June meeting, down from a peak of 64 percent the day before Bernanke spoke.

``It seems the Fed would like to pause and the market is second-guessing that, saying it might be premature given robust growth and increasing awareness of inflation,'' said Bulent Baygun, head of interest-rate strategy at Barclays Capital Inc. in New York.

Boosting Estimates

Economists at firms such as Credit Suisse boosted their estimates of first-quarter growth today after a separate Commerce Department report showed the trade deficit narrowed to $62 billion in March, from $65.6 billion in February and a record $68.6 billion in January. The smaller deficit means a larger share of what U.S. consumers purchased during the first quarter was produced domestically.

Gross domestic product expanded at an annual rate of 4.8 percent last quarter, the Commerce Department said in a preliminary report on April 28. The median forecast of 18 economists is for a revision to 5.9 percent on May 25. In a separate poll of more than 80 from April 28 to May 8 was for rates of 3 percent during the third and fourth quarters.

Treasuries remained lower even after the University of Michigan today said its index of consumer sentiment decreased to 79 in May from 87.4 the previous month. A reading of 86 was expected, according to the median forecast of 61 economists surveyed by Bloomberg News.

TIPS

Yields on Treasury Inflation Protected Securities, or TIPS, which provide a hedge against rising consumer prices, show investors are more concerned about inflation now than they were at the beginning of the year.

The gap in yields between U.S. notes and inflation-linked debt due in 10 years reached 2.74 percentage points yesterday, the biggest since March 2005. The difference represents the average rate of inflation traders expect over the life of the securities. It may widen further to almost 3 percent within two months, Barclays's Baygun said.

Consumer prices will probably rise 3.6 percent in the second quarter, according to the median estimate in a monthly Bloomberg survey between April 28 and May 8. The economists who took part in the previous survey estimated inflation would quicken 3.4 percent for the quarter.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net; Rodrigo Davies in London at rdavies13@bloomberg.net.

Last Updated: May 12, 2006 17:55 EDT