Aug. 10 (Bloomberg) -- U.S. five-year Treasury notes were little changed before an auction of the securities today, at which taxpayers are set to pay the most since 2002 on speculation the Federal Reserve will keep raising interest rates.

Five-year note yields reached a four-month high yesterday after the Fed boosted its benchmark rate for the 10th straight meeting and kept a plan for further increases. The Treasury will sell $13 billion of five-year notes today. Signs of faster U.S. growth prompted analysts at Deutsche Bank AG and Goldman Sachs Group Inc. to raise their Fed rate forecasts this week.

``The tightening cycle will continue,'' said Prashant Newnaha, a fixed-income strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``We remain bearish on Treasuries.''

The yield on the benchmark 3 7/8 percent note due July 2010 was little changed at 4.23 percent as of 9:12 a.m. in London. It reached 4.29 percent yesterday, the highest since March 30. Bond yields move inversely to prices.

The price of the current five-year note rose 1/32, or 31 cents per $1,000 face amount, to 98 7/16. The Treasury will sell new notes due August 2010 today. The last time the Treasury paid a coupon of more than 4 percent on five-year debt was May 2002.

Ten-year notes were little changed, yielding 4.38 percent. They rose yesterday amid relief among some investors that the Fed's statement didn't signal greater concern about accelerating inflation. Policy makers raised their interest-rate target by a quarter percentage point to 3.5 percent.

Some Investors `Encouraged'

``The Fed said inflation remains under control and that has encouraged some investors,'' said Rory Robertson, interest-rate strategist at Macquarie Bank Ltd., Australia's largest investment bank in Sydney. ``There was some commentary the Fed may start moving more quickly. The fact it did not signal any more aggressive steps left that crew without much to go on.''

Policy makers said in their statement yesterday that ``longer-term inflation expectations remain well contained.'' The Fed also reiterated that it plans to raise interest rates ``at a pace that is likely to be measured.''

Deutsche Bank yesterday raised its year-end forecast for the Fed's target by a quarter percentage point to 4.25 percent. The bank revised its predictions based on its forecast for a 5 percent growth rate this quarter, up from a 3.4 percent pace in the April through June period.

Reports in the past month have shown stronger-than-expected gains in employment, manufacturing and consumer spending. The economy will grow at a 4.1 percent annual rate this quarter, the most since the first three months of 2004, according to a Bloomberg survey of 66 economists.

Retail Sales

U.S. retail sales climbed the most in more than a year in July, a Commerce Department report tomorrow may show. Retail sales rose 2.1 percent after gaining 1.7 percent in June, according to the median estimate of 69 economists surveyed by Bloomberg.

Any losses in Treasuries may be limited by speculation among some investors that the pickup in growth this quarter will prove temporary.

``By the end of the year the economy begins to slow down and the housing market begins to cool off and the inflationary pressures which are present in a mild form turn into disinflationary pressures,'' said Bill Gross, manager of the world's biggest bond fund at Newport Beach, California-based Pacific Investment Management Co.

Treasuries maturing in two to five years are the ``sweet spot'' of the bond market, Gross said in an interview yesterday.

Good Level to Buy

The half percentage-point increase in 10-year Treasury yields over the past six weeks from a 14-month low of 3.08 percent on June 3 has made them attractive to investors, said Peter Jolly, head of research at National Australia Bank Ltd. in Sydney.

``Treasuries are nearing pretty good levels to buy,'' Jolly said. ``The Fed will hike some more, but the market expects that and it is already priced in.''

Interest-rate futures show traders have trimmed their expectations for the extent of further Fed rate increases.

Yields on December Eurodollar futures dropped to 4.33 percent yesterday from 4.35 percent on Aug. 8. The futures settle at a three-month lending rate that has averaged about 21 basis points more than the Fed's target over the past 10 years.

To contact the reporters on this story: Nicholas Reynolds in Singapore nreynolds2@bloomberg.net.

Last Updated: August 10, 2005 04:36 EDT