March 17 (Bloomberg) -- U.S. 10-year Treasuries gained in Asia, pushing yields to eight-month lows, after the Federal Reserve said job growth ``has lagged'' and inflation is ``muted,'' fueling speculation the key interest rate won't rise until 2005.

Fed policy makers yesterday kept their benchmark rate at 1 percent, the lowest since July 1958, and reiterated they can be ``patient'' before increasing it ``with inflation quite low.'' The comments boosted demand for Treasuries with longer maturities because slower inflation preserves the value of debt's fixed payments.

``They did certainly lean a little bit less on the bullish side,'' John Canavan, a bond strategist at Stone & McCarthy Research Associates in Princeton, New Jersey, said in an interview. ``That was clearly enough to send Treasuries sky- rocketing.''

The benchmark 4 percent note maturing in February 2014 rose 6/32, or $1.88 per $1,000 face amount, to 102 26/32 as of 2:40 p.m. in Tokyo, pushing the yield down 2 basis points to 3.66 percent, the lowest since July 14. The yield this month has fallen from as high as 4.1 percent to about 60 basis points above June's 45-year low of 3.07 percent. A basis point is 0.01 percentage point.

The rate on the September Eurodollars futures contract fell 4 basis points to 1.29 percent in Singapore trading as investors pared expectations for a Fed rate increase in the third quarter. Eurodollar futures settle to the three-month London interbank offered rate, or Libor, which has averaged 24 basis points more than the Fed's target over the past 10 years.

Inflation Report

Consumer prices excluding food and energy probably rose 1.1 percent in the 12 months through February, matching the slowest pace in more than 40 years, according to the median forecast of economists surveyed by Bloomberg News. The Labor Department releases the report today.

The economy added 21,000 jobs last month, below the median forecast of an increase of 130,000 in a Bloomberg survey of economists.

``The labor market is still weak, the recovery is slow, and that will put a cap on inflation,'' said Freddy Lim at Lehman Brothers Japan Inc. ``I see the Fed keeping rates on hold for the next six months at the very least, if not the next nine.''

Some investors may sell as yields have dropped about 30 basis points in March, more than any full month since September, said analysts such as Lim.

``Yields at these levels may be looking too low,'' Tokyo- based Lim said. ``The recovery is there even though it's slow.'' Lim said he wouldn't recommend investors buy 10-year Treasuries at yields below 4 percent.

The U.S. securities unit of Lehman is one of the 23 primary U.S. government securities dealers, which trade directly with the Fed's New York branch.

`Gas Pedal'

``We still have good economic growth, job growth is lagging, we still have plenty of capacity to expand, and inflation is nowhere to be seen -- all that means the Fed can keep its foot on the gas pedal,'' H. Robert Heller, who served on the Federal Reserve Board from 1986 to 1989 and is now chief economist at SDR Capital Management Inc. in San Francisco, said yesterday.

The Fed will wait until 2005 to raise its key interest rate, according to economists at 10 of primary dealers. The forecasts by Wall Street's largest bond-trading firms were made before the Fed's statement.

Treasuries maturing in 10 years or more have returned 6.8 percent this year including reinvested interest, the best performance among world bond markets, according to the European Federation of Financial Analysts Societies. The Standard & Poor's 500 Index of stocks has dropped 0.1 percent.

To contact the reporter on this story: Beth Thomas in Tokyo bthomas1@bloomberg.net

Last Updated: March 17, 2004 01:03 EST