Nov. 17 (Bloomberg) -- Treasuries rose the most in almost three weeks after a government report showed U.S. housing starts declined in October to the lowest in more than six years.

The decline suggests home construction will slow economic growth in the fourth quarter. The Federal Reserve has kept interest rates steady at its last three policy meetings, citing a weaker housing market.

``It supports the Fed's view that housing is closer to the trough than the top,'' said T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York. ``It's moderately bullish.''

Yields on benchmark 10-year notes fell 7 basis points, or 0.07 percentage point, to 4.60 percent at 4:28 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 5/8 percent note due in November 2016 rose 17/32, or $5.31 per $1,000 face amount, to 100 5/32. For the week, the yield rose 1 basis point. Yields move inversely to prices.

Speculation that a hedge fund may have large losses bolstered the safe haven appeal of Treasuries, said traders and strategists including John Jansen, director of fixed-income sales at New York-based investment firm CastleOak Securities.

Builders broke ground on 1.486 million new homes at an annual rate, down 14.6 percent from September's 1.74 million pace, the Commerce Department said today. Building permits dropped to a 1.535 million pace, a record ninth straight decline and the lowest since December 1997.

Economists polled by Bloomberg News forecast starts would fall to a 1.68 million unit pace from an originally reported 1.772 million rate in September, according to the median of 68 estimates, which ranged from 1.58 million to 1.78 million.

Weak Housing

Traders who had bet bonds would fall, so-called short positions, had to reverse those bets after the yield fell below 4.63 percent, said Rick Klingman, a Treasury and interest-rate swaps trader at ABN Amro Inc. in New York.

``Once prices moved above where they broke down yesterday, we had some short covering come in,'' Klingman said.

Interest-rate futures suggest traders see a 34 percent chance policy makers will cut their target rate for overnight loans to 5 percent from 5.25 percent in March. The odds were 11 percent yesterday.

St. Louis Fed President William Poole this week said policy makers are paying ``special attention'' to housing, and that he is concerned about the number of would-be purchases being canceled.

Inflation Expectations

Gains may be limited without signs of further weakness in the economy and Fed officials focusing on keeping prices from accelerating, investors said.

``The bond market's already priced for a weak housing market, so there's a limit to how much you can rally on weak housing numbers,'' said Jay Mueller, who manages about $3 billion at Wells Capital Management in Milwaukee, Wisconsin.

Yields on 10-year notes touched 4.54 percent on Nov. 14. They fell to 4.53 percent on Sept. 25, a level not reached since February.

``We have no tolerance for continued inflation above 2 percent,'' Dallas Fed President Richard Fisher said at a conference in Frankfurt.

Minutes of the central banks policy meeting on Oct. 24-25, released Nov. 15, said ``all members agreed that the risks to achieving the anticipated reduction in inflation remained the greatest concern.''

The consumer price index declined 0.5 percent last month, matching September's drop, the Labor Department said yesterday. Economists expected the index to decrease 0.3 percent, according to the median forecast in a Bloomberg survey.

``The Fed will stay on hold for a while, another three to six months, because they're still worried about inflation,'' said Nasri Toutoungi, who oversees $23 billion of bonds at Hartford Investment Management Co. in Hartford, Connecticut. ``That's one reason we're not penetrating to lower yield levels.''

To contact the reporter for this story: Deborah Finestone in New York at dfinestone@bloomberg.net; Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: November 17, 2006 16:30 EST