June 23 (Bloomberg) -- Treasury two-year notes rose for the first time since April as investors sought refuge from possible hedge fund losses.

Two-year yields fell more than 10-year yields this week, increasing the yield premium of the longer-term debt to the most since October 2005, as Bear Stearns Cos. offered to provide $3.2 billion in loans to bail out one of its money-losing hedge funds. The Federal Reserve is forecast by economists to hold its benchmark lending rate steady at its meeting next week.

``We've seen a flight to quality because people can't get a handle on the implications of a liquidation out of Bear Stearns,'' said Thomas Atteberry, who manages $2.3 billion in fixed-income assets in Los Angeles at First Pacific Advisors.

Two-year note yields fell 12 basis points, or 0.12 percentage point, to 4.91 percent this week, according to bond broker Cantor Fitzgerald LP. The price of the 4 7/8 percent security due in May 2009 rose 7/32, or $2.19 per $1,000 face value, to 99 30/32, for the first weekly gain since April 20.

Benchmark 10-year notes had their first weekly gain since May 4, pushing yields down 4 basis points to 5.13 percent. The spread between 10- and two-year notes reached 23 basis points yesterday.

Sell-Off `Done'

All 104 economists surveyed by Bloomberg forecast the Federal Open Market Committee to hold the target rate for overnight lending at 5.25 percent at its meeting on June 28. Ten-year yields reached the five-year high of 5.327 percent on June 13 as traders speculated the U.S. economy is strong enough to keep the Fed from cutting borrowing costs this year.

Treasuries rose earlier this week after a government report showed builders broke ground on fewer homes last month, aiding speculation that a slump in housing will continue to be a drag on the economy.

The Treasury market ``has done its sell-off,'' said Tom Di Galoma, head of U.S. Treasury trading in New York at Jefferies & Co. ``I don't think it's going down before the FOMC meeting.''

Fed fund futures show traders see an 86 percent chance the Fed will maintain borrowing costs through 2007. A month ago there was a 60 percent likelihood of a quarter percentage point reduction in its key rate.

Bear Stearns' proposed bailout, the biggest rescue since 1998, came after creditors started seizing assets.

The firm will provide a credit line to the High-Grade Structured Credit Strategies Fund, which will be backed by the fund's assets. Bear Stearns made the offer after creditors including Merrill Lynch & Co. and Lehman Brother Holdings Inc. put up some of their collateral up for sale to investors.

`Volatility You're Seeing'

``With the volatility you're seeing in other markets, people are wanting to be short,'' said Thomas Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment banking arm of Canada's biggest lender.

The two Bear hedge funds speculated in highly rated CDOs --securities backed by bonds, loans and derivatives -- that were hurt in March and April as defaults on subprime mortgages to people with poor or limited credit histories increased.

The yield curve, which charts the gap between two- and 10 year debt, returned to its normal positive configuration earlier this month amid signs global growth may help the U.S. economy to rebound. Investors typically demand a higher yield for the risk of owning longer-term debt in case inflation rises, eroding the value of fixed payments.

``It's an indication the market is starting to think the economy could do better,'' said William Hornbarger, chief fixed-income strategist in St. Louis at A.G. Edwards & Sons Inc.

Two-year note yields have exceeded those of 10-year securities for most of the past year, inverting the so- called yield curve. The shorter-term yields were 19 basis points more than 10-year notes on Nov. 27, the most since 2000.

Ten-year notes have yielded an average of 86 basis points more than two-year notes over the past two decades, according to data compiled by Bloomberg.

To contact the reporters on this story: Deborah Finestone in New York at dfinestone@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net.

Last Updated: June 23, 2007 07:07 EDT