May 23 (Bloomberg) -- Treasury 10-year yields rose to the highest level since January as traders reduced the odds of an interest rate cut by the Federal Reserve this year.

The 10-year note's yield was higher than that of the two- year security for the first time in three weeks on signs of resilience in the U.S. economy. Richmond Fed President Jeffrey Lacker said yesterday it's the central bank's responsibility to curb inflation and it would be a mistake to rely on slower growth to stem price increases.

``Quite a few players threw in the towel that the Fed will reduce rates,'' said Richard Gilhooly, interest-rate strategist in New York at BNP Paribas, one of the 21 primary dealers of U.S. government securities. ``There has been too much focus on the housing market as an asset class that needs to be bailed out by the Fed.''

The yield on the benchmark 10-year note rose 2 basis points, or 0.02 percentage point, to 4.85 percent at 5:07 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It touched 4.87 percent, the highest level since Jan. 31. The price of the 4 1/2 percent security due in May 2017 fell 5/32, or $1.56 per $1,000 face amount, to 97 1/4.

The two-year note's yield was unchanged at 4.84 percent, after touching 4.86 percent, the highest since Feb. 23. The 30- year bond's yield rose 2 basis points to 5.01 percent. It touched 5.02 percent, the highest since Aug. 16.

``I like these levels,'' said Michael Cheah, who manages $2 billion in bonds in Jersey City, New Jersey, at AIG SunAmerica Asset Management Corp. ``I'm adding to my portfolio, buying the 10-year note.''

Yield Curve

Two-year note yields had exceeded those of 10-year securities since early May, creating the so-called inverted yield curve. Two-year yields were also higher from mid-August to mid-March. That's unusual for the Treasury market, in which investors typically demand higher yields for the risk of owning longer-term debt.

The Richmond Fed's Lacker, who doesn't vote on interest rates this year, said in a speech yesterday to the Money Marketeers of New York University that central banks, not the labor market, drive inflation down.

Lacker, who alone voted to lift interest rates in the last four meetings of 2006, said after the speech he was ``comfortable'' for now that the Fed's benchmark rate will achieve the bank's aims. He added that the central bank's stance on rates will be ``re-evaluated'' as circumstances change through the year.

Fed's Inflation Gauge

The central bank's preferred inflation gauge, which excludes food and fuel costs, has exceeded the Fed's comfort range of 1 percent to 2 percent for about three years.

The Fed held its target rate for overnight lending between banks at 5.25 percent on May 9, unchanged since policy makers increased it to that level in June. The central bank repeated its March assessment that inflation remains the ``predominant'' risk to the economy.

Traders reduced bets the Federal Reserve will cut interest rates this year. Fed funds futures today showed about a 19 percent chance of a rate cut by September, compared with 41 percent about a week ago.

An index of Treasury securities has dropped 0.7 percent so far in May, heading for the biggest monthly decline since December, according to Merrill Lynch & Co.

`Long is wrong at this point,'' said Lisa Brown Premo, a managing director and portfolio manager in Charlotte, North Carolina, at Evergreen Investments, which is responsible for $130 billion in fixed-income assets.

`Value Territory'

Declines in Treasuries may be limited as investors were the most optimistic on U.S. government debt in four years, a JPMorgan Chase & Co. survey showed. The weekly index of sentiment toward Treasuries, based on a poll of clients, increased to 11 percent in the week ending May 21, from 3 percent the prior week. It was the most bullish in the history of the survey, which began in August 2003.

``In the near term, this bear move has limits, and it's starting to bring yields into value territory,'' said George Goncalves, chief Treasury and agency strategist in New York at primary dealer Morgan Stanley.

A government report will probably show orders for durable goods rose in April for a third straight month. Orders for items made to last three years or more increased 1 percent last month after a 4.3 percent gain the previous month, according to the median forecast of 73 economists surveyed by Bloomberg News.

Sales of new homes inched up to an annual rate of 860,000 last month, a separate survey showed. The Commerce Department will release both reports in Washington tomorrow.

The Labor Department is forecast to report tomorrow that initial jobless claims rose in the week that ended May 19 from a four-month low.

To contact the reporters on this story: Annie Pinkert in New York at apinkert@bloomberg.net; Deborah Finestone in New York at dfinestone@bloomberg.net.

Last Updated: May 23, 2007 17:12 EDT