Dec. 28 (Bloomberg) -- U.S. 10-year notes rose for the first day in four as yields near the highest in three weeks attracted some investors.

Treasuries also gained because of speculation higher interest rates will prevent inflation, which erodes the value of fixed-income securities, from accelerating. The yield on the 10- year note climbed 21 basis points, or 0.21 percentage point, since Dec. 16. Two-year notes advanced before a $24 billion sale of the securities tomorrow.

``Treasuries are cheaper now than they were a week ago, and that has created some buying opportunities,'' said Akio Shimizu, a trader in Singapore at Mitsubishi Trust & Banking Corp., a unit of Japan's second-largest lender by assets. ``There is some value.''

Benchmark 4 1/4 percent notes maturing in November 2014 rose 1/8, or $1.25 per $1,000 face amount, to 99 3/4 as of 9:27 a.m. in London, according to bond broker Cantor Fitzgerald LP. The yield fell 2 basis points to 4.28 percent.

The U.S. Bond Market Association, an industry trade group, recommended that trading close in London today because of a holiday. Gains or declines in Treasuries may be exaggerated this week because trading is less than usual, Shimizu said.

The 2 7/8 percent note maturing in November 2006 yielded 3.04 percent before the Treasury's monthly sale. The notes had a yield of 3.08 percent in pre-auction trading, suggesting they will be sold at the highest yield since May 2002.

3.1 Percent

An index of U.S. government debt maturing in more than a year is the second-worst performer in 2004 after Japan among 26 government bond markets tracked by the European Federation of Financial Analyst Societies. The U.S. index returned 3.1 percent through Dec. 24, including reinvested interest. Japanese government debt returned 1.3 percent.

Treasuries fell yesterday on concern the dollar's decline against the euro and the yen will crimp demand for U.S. assets. Shimizu said he may buy 10-year notes at yields of about 4.35 percent. The yield climbed to 4.31 percent yesterday, the highest since Dec. 3.

The U.S. dollar reached an all-time low of $1.3640 per euro yesterday. The currency weakened 8.5 percent against the euro and 6.2 percent versus the yen since the end of September.

The previous sale of two-year Treasury notes on Nov. 23 drew bids worth 2.61 times the amount of debt on offer. So-called indirect bidders, which include foreign central banks, bought 43.5 percent of the securities, from 41.3 percent in October.

No Rush

``There is no reason to rush into Treasuries,'' said Hidetaka Namiki, head bond trader at the Tokyo unit of Banc of America Securities LLC. ``Investors are just standing aside.''

Japan, the biggest overseas holder of U.S. government debt, cut its holdings for a second month in October, the first back-to- back decrease since September 2001, according to the most recent data from the Treasury Department. Buying from China, the second- largest foreign holder, and Taiwan, slowed in October.

Foreign central bank holdings of Treasuries in accounts at the Fed were at a daily average $1.06 trillion in the week ended Dec. 22, little changed from the start of the month. The amount rose every month since July 2003.

The 10-year yield may rise to 4.4 percent in the next week, Namiki said. Banc of America is one of 22 primary U.S. government securities dealers that trade directly with the Federal Reserve Bank of New York.

Gains may also be tempered because of expectations the Conference Board today will say its index of consumer confidence increased this month to 94 from 90.5, according to the median forecast of 51 economists surveyed by Bloomberg News.

Ward Off Inflation

Signs of faster growth may reinforce expectations the Fed will keep to its ``measured'' pace of interest-rate increases next year to stave off inflation.

Central bank policy makers raised the target for the overnight lending rate between banks five times since June, to 2.25 percent from 1 percent. The rate will probably be 3.5 percent by 2006, based on the median forecast of 61 economists surveyed by Bloomberg News this month.

Inflation will slow next year as the Fed lifts rates, economists in the monthly survey said. The U.S. consumer price index may gain at a 2.8 percent pace in the first quarter from the year before, from an estimated 3.3 percent pace in the final quarter of 2004, economists forecast.

Two-year notes are typically more sensitive to changes in monetary policy while 10-year and longer-maturity securities are more sensitive to variations in inflation.

``Inflation is stable and it becomes less of a concern as the Fed hikes rates,'' Shimizu said. He said he favors 10-year Treasuries over shorter maturities.

To contact the reporter on this story: Shamim Adam in Singapore sadam2@bloomberg.net.

Last Updated: December 28, 2004 04:30 EST