June 8 (Bloomberg) -- U.S. Treasuries dropped, pushing 10- year yields to the highest since May 2002, on concern accelerating economic growth and inflation will encourage central banks to raise interest rates.

The benchmark bonds extended declines after their biggest slump yesterday in more than three years. Ten-year yields exceed those on two-year debt by the most in a year in another sign investors anticipate faster expansion in the global economy. Debt markets in Japan, Germany, Poland and South Africa slid.

``Investors are basically bailing out,'' said Felix Stephen, who helps manage $6.8 billion at Advance Asset Management in Sydney. ``People first thought interest rates were going down'' rather than up.

The yield on the 4 1/2 percent security due in May 2017 increased 3 basis points, or 0.05 percentage point, to 5.19 percent as of 8:02 a.m. in New York, according to bond broker Cantor Fitzgerald LP. It rose as high as 5.25 percent after breaching 5 percent yesterday for the first time since August.

The price fell 11/32, or $3.44 per $1,000 face amount, to 94 23/32.

``The yield levels are starting to look attractive but sentiment is bad,'' said Christian Zima, a fixed-income fund manager in Vienna at Raiffeisen KAG, which oversees the equivalent of $24 billion of bonds. ``There are further rate hikes getting priced in.''

Traders now assign a 44 percent chance the Fed will raise rates by 25 basis points by December, compared zero percent a month ago, according to options on Fed funds futures.

Fed Outlook

The Federal Reserve has kept its overnight lending rate between banks at 5.25 percent at its last seven meetings. Policy makers will next decide on interest rates on June 28.

``There will be another selling wave,'' Kornelius Purps, a fixed-income strategist at Unicredit Markets and Investment Banking, said in Munich. ``Investors shouldn't try to catch the falling knife. They'll wait until it reaches the floor.''

Purps expects the 10-year yield to rise to between 5.25 percent and 5.30 percent next week.

New Zealand two-year government notes fell for a sixth day after the country's central bank this week raised borrowing costs to a record high of 8 percent. German bunds also declined after the European Central Bank lifted its benchmark rate two days ago. Japanese and Australian government bonds dropped.

Bonds may be supported as stock markets in the U.S., Asia and Europe slumped on the expectations of higher rates, making yields on debt securities more attractive for some investors.

Stock Slide

European stocks fell for a fifth day, the longest rout in three months after a plunge in U.S. equities yesterday. Asian share markets dropped the most in seven weeks.

``High yields are making us more interested in bonds,'' said Michael Hughes, who helps manage $40 billion as chief investment officer at Baring Asset Management in London. ``Given the run in equities we've had, it's not surprising for a correction to happen.''

The spread between two- and 10-year note yields widened to 15 basis points, from 10 points yesterday. The yield on the two- year security climbed 1 basis point to 5.04 percent.

``The near-term setback in equities should support the short end of the curve,'' said Hidehiko Maejima, a bond strategist at BNP Paribas Securities Japan Ltd. in Tokyo, referring to bonds maturing in less than 10 years.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net;

Last Updated: June 8, 2007 08:04 EDT