Aug. 23 (Bloomberg) -- U.S. Treasury notes fell as a decline in oil prices from a record high reached Friday cooled speculation rising fuel costs will curb economic growth.

The 10-year Treasury note's yield, which moves in the opposite direction as its price, last week traded at a four-month low of 4.15 percent as oil extended its advance over the past year to 47 percent.

``Traders think oil has hit a short-term high,'' said Thomas Tucci, head of government bond trading at Mizuho Securities USA Inc. in Hoboken, New Jersey. ``The market is very sensitive to growth- inhibiting factors as it wrestles with the idea of how much (Federal Reserve) tightening will take place between now and the end of the year.''

At 9:48 a.m. in New York the 4 1/4 percent note maturing in August 2014 fell almost 3/8, or $3.75 per $1,000 face amount, to 99 25/32, according to bond broker Cantor Fitzgerald LP. Its yield rose 5 basis points, or 0.05 percentage point, to 4.28 percent.

Crude oil for October settlement was trading at $43.57 a barrel in London. On Friday, the price reached $45.14 on concern supplies may drop.

Rising oil is ``a tax on the economy and consumer confidence, a factor that would reduce (economic) growth and therefore bring rates down,'' said Mark Mahoney, head of interest- rate strategy at UBS Securities LLC in Stamford, Connecticut. ``As oil comes off (its highs), that becomes less of a constraining factor.''

Mahoney said the note's yield may to rise to 4.5 percent in coming weeks and 4.75 percent by year-end. UBS and Mizuho are among the 22 primary dealers of U.S. government securities that trade with the central bank's New York branch.

Treasuries also weakened as U.S. stocks advanced, curbing demand for fixed-income assets. The Standard & Poor's 500 Index, which last week rose 3.2 percent, its biggest gain since October, rose 0.1 percent in early trading.

Two-Year Auction

The yield on the 2 3/4 percent note maturing in July 2006 climbed 3 basis points to 2.47 percent. The Treasury plans to sell two-year notes at an auction Wednesday. The size of the sale will be announced at about 11 a.m. today Washington time.

``I'm still expecting the Fed to raise rates at all the meetings left this year,'' said Yasutoshi Nagai, an economist at Daiwa Securities SMBC Co. in Tokyo. ``There are few investors who want to buy two-year notes at these levels. We are not expecting a good performance at the two-year auction.''

The government will probably sell $24 billion of the securities, said Jersey-City, New Jersey-based fixed-income research firm Wrightson ICAP LLC. Wrightson is a unit of the U.K.'s ICAP Plc, the world's largest inter-dealer broker.

Cutting Estimates

``A decline in oil means a tax on growth lessens, which should get investors looking more at the chance of the Federal Reserve hiking rates,'' said Nitin Agarwal, a fixed-income analyst in London at Lehman Brothers Holdings Inc.

Lehman, which is also a primary dealer, expects the U.S. central bank to raise its target rate for overnight loans between banks by two more quarter-percentage points this year, to 2 percent, and that the 10-year Treasury yield will trade at 4.40 percent by year-end, Agarwal said. The Fed has three more rate- setting meetings this year.

Treasuries may also drop on expectations a report on Wednesday will show orders for durable goods increased 1 percent in July, after rising 0.9 percent in June, according to the median forecast of 53 economists in a Bloomberg News survey.

Treasuries are up since June 15 as inflation, consumer spending and employment fell below expectations. The 10-year note yield dropped from 4.87 percent on June 14 to 4.15 percent on Wednesday, the lowest level in four months.

Interest-rate futures suggest traders expect the central bank to boost the federal funds rate to 1.75 percent at its meeting on Sept. 21. Expectations for additional increases this year declined. Policy makers also meet in November and December.

Investor Sentiment

Investors in Treasury securities are less bearish amid speculation economic growth will slow as oil prices surge, leading businesses to curb hiring and investment.

Ried, Thunberg & Co.'s index gauging sentiment toward the 10- year Treasury note was 42 Friday, up from last week's 38, the lowest in 14 years. A reading below 50 indicates investors expect the note's price to drop by the end of September. The 48 international investors polled by the Jersey City, New Jersey- based research firm manage a total $1.36 trillion.

Futures traders pared bets that the 10-year note will decline, figures reflecting Tuesday's holdings at the Chicago Board of Trade show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the note compared with those on a gain -- so-called net shorts -- dropped to about 106,400, the fewest since April, from 143,600 a week earlier. The average this year is a net short position of 111,000. There hasn't been a net long position since February.

Futures are agreements to buy or sell assets at a set price and date. The figures are from a weekly report by the Washington- based Commodity Futures Trading Commission released Friday.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: August 23, 2004 09:50 EDT