Sept. 9 (Bloomberg) -- U.S. two-year notes are poised for the biggest weekly decline since July as traders returned to the view the Federal Reserve will stick with its ``measured'' pace of interest-rate increases.

Ten-year Treasuries also fell, heading for the first weekly loss in five, due to concern inflation may accelerate. Comments by Fed officials this week, including Michael Moskow and Janet Yellen, suggest the central bank is likely to raise rates at its Sept. 20 policy meeting for an 11th time since June last year.

``With risks of inflation increasing, the market is starting to realize that there is little possibility of the Fed taking a pause from raising interest rates,'' said Yasutoshi Nagai, an economist at Daiwa Securities SMBC Co. in Tokyo. ``I still don't recommend buying Treasuries.''

Two-year note yields held at 3.87 percent as of 12:16 p.m. in Singapore, according to bond broker Cantor Fitzgerald LP. It has risen 11 basis points this week, the most since the week ended July 1.

The price of the 4 percent note maturing in August 2007 was little changed at 100 1/4. The yield may rise to 4 percent by the end of the month, Nagai said.

Benchmark 10-year note yields were 4.14 percent. The yield, which moves inversely to the price, is up about 11 basis points this week, ending a four-week rally.

The need to continue increasing borrowing costs remains a ``probable scenario'' for the central bank after Hurricane Katrina, San Francisco Fed President Yellen said yesterday.

Import Prices

Fed Bank of Chicago President Moskow said on Sept. 7 that rising inflation pressures require ``appropriate'' interest-rate increases, even with a possible slowdown caused by the hurricane. Moskow votes on Fed monetary policy this year, while Yellen doesn't.

The Labor Department may say today prices of goods imported into the U.S. rose in August by the most in five months as oil prices surged to a record. The import price index probably gained 1.4 percent last month, after a 1.1 percent advance in July, according to the median estimate of 39 economists surveyed by Bloomberg News.

``Fed officials have been warning about the upside risks to inflation, and Treasuries will suffer if inflation prints higher,'' said Peter Jolly, Sydney-based head of research at National Australia Bank Ltd., the nation's largest lender by assets. ``This is not a `buy at any price' kind of market.''

The 10-year yield may rise to 4.5 percent by the end of the year, Jolly said.

Crude oil futures reached an all-time high $70.85 a barrel on Aug. 30 in New York, 49 percent higher on the year. The contracts traded at $65.03 in after-hours trading today.

Slower Growth

Declines in Treasuries may be tempered because of concern growth in the U.S. will slow from the effects of the hurricane, the most costly disaster in U.S. history.

Hurricane Katrina, which flooded New Orleans and pelted the Gulf Coast of Louisiana, Mississippi and Alabama with winds of 140 miles per hour, may have caused more than $100 billion in total economic damage, according to Risk Management Solutions Inc., an insurance-industry consultant.

``We see growth slowing in the current quarter and the next two quarters as well,'' said Takashi Yamamoto, a trader in Singapore at Mitsubishi Trust & Banking Corp., a unit of Japan's second-largest lender. The 10-year yield may fall to 4 percent in the next two months, he said.

Cutting Estimates

The Congressional Budget Office said on Sept. 7 that the hurricane could reduce growth by as much as 1 percentage point in the second half of the year and cut employment through the end of 2005 by about 400,000.

Economists at some of the U.S.'s biggest bond firms have also shaved their estimates for third-quarter growth.

Before the hurricane, the U.S. economy was expected to expand 4.1 percent this quarter, up from a 3.3 percent pace in the second quarter, a monthly Bloomberg survey showed.

Lehman Brothers Inc. trimmed its projection by 0.7 percentage point to 3.8 percent, Bear Stearns & Co. economists cut their forecast by a percentage point to 3.5 percent, and Goldman Sachs Group Inc. economists dropped their estimate to 3.5 percent from 5 percent.

Traders and investors will also look for more clues on the outlook for inflation, which erodes the fixed payments on bonds, when the Labor Department releases reports on August producer and consumer prices on Sept. 13 and 15.

Rate Expectations

The Fed has raised its overnight target lending rate between banks by a quarter-percentage point at each of the 10 meetings since June 2004, bringing the rate to 3.5 percent.

Interest-rate futures show traders expect about a 95 percent chance the central bank will raise its target rate a quarter point to 3.75 percent on Sept. 20. The odds fell to about 70 percent last week after the hurricane, from a 100 percent chance before the disaster.

Two-year notes are typically more sensitive to changes in the outlook for interest rates, while 10-year Treasuries are more prone to changes in inflation expectations.

The difference in yield between two- and 10-year notes tends to widen when shorter-maturity securities rise, longer-dated notes fall or when both happen at the same time. The gap was 27 basis points today, and widened last week as investors speculated a pause in the Fed's cycle of interest-rate increases.

To contact the reporters on this story: Shamim Adam in Singapore sadam2@bloomberg.net; Nicholas Reynolds in Singapore nreynolds2@bloomberg.net.

Last Updated: September 9, 2005 00:19 EDT