Feb. 23 (Bloomberg) -- U.S. Treasuries rose, pushing the benchmark 10-year note's yield to a six-week low, as losses in subprime mortgage bonds fueled demand for the highest-quality debt securities.

The rising cost of insurance against default in bonds backed by mortgage loans to people with poor credit history renewed speculation a slowdown in residential real estate will hurt the economy. Yields on interest-rate futures declined as traders increased bets the Federal Reserve will lower rates this year.

``There has been some very significant buying of the market going on,'' said Dominic Konstam, head of interest-rate strategy in New York at Credit Suisse Group, one of the 21 primary U.S. government securities dealers that trade with the central bank. ``People are worried about contagion effects of credit products in general.''

The benchmark 10-year note's yield declined 6 basis points, the most in a week, to 4.67 percent at 4:28 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield, which moves inversely to price, earlier touched 4.66 percent, the lowest since Jan. 10. A basis point is 0.01 percentage point. The price of the 4 5/8 percent security maturing in February 2017 rose 15/32, or $4.69 per $1,000 face amount, to 99 20/32.

On the week the yield is lower by 1.6 basis points, its fourth straight weekly decline. Yields dropped the past three weeks amid signs of weakness in housing and manufacturing.

An index of credit-default swaps on 20 subprime mortgage bonds with the lowest investment-grade ratings sold in the second half of last year dropped to a record low for a sixth straight day, as companies lending to the riskiest borrowers report losses.

Delinquencies and Defaults

The index fell 7.7 percent today and is down 30 percent since Jan. 18. The level of delinquencies and defaults on subprime mortgages made last year is the highest ever for such loans at a similar age, according to Bear Stearns Cos. At least 20 lenders have shut down, scaled back or sold themselves since the start of 2006, according to data compiled by Bloomberg.

``You see a market like that starting to break down, and there's just a natural safe-haven bid to buy Treasuries,'' said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley. Treasuries are considered immune from default because they are backed by the U.S. government.

Fed Chairman Ben S. Bernanke, testifying before Congress last week, said the housing market was a ``significant'' risk to the central bank's outlook for strengthening economic growth this year and next year.

Eurodollar Futures

Home Depot Inc., the world's largest home-improvement retailer this week said its fourth-quarter profit fell 28 percent, the most ever, as demand for building supplies slowed. U.S. residential construction fell the most since 1991 last year.

The odds that the Fed will lower its 5.25 percent target for the overnight lending rate between banks rose in interest-rate futures markets for the first time in three days. Traders pared bets on a cut in the federal funds rate after the government's broadest inflation gauge rose more than expected in January.

Yields on Eurodollar futures expiring in December declined 5 basis points to 5.06 percent. The futures forecast a three-month lending rate that is determined in part by the federal funds rate. The three-month rate has been 5.36 percent since Dec. 28.

The Fed raised the fed funds target at each of its 17 meetings from June 2004 to June 2006.

Government debt also gained as traders expected purchases related to month-end index rebalancing and new commercial mortgage-backed securities to lift prices.

On the last business day of each month, new bonds sold during the month are added to bond market indexes, prompting some investors to buy on that day. The effect is typically biggest at the end of February, May, August and November, when the Treasury holds its quarterly auctions of notes and bonds.

The government sold $69 billion of notes and bonds in five auctions this month, including $31 billion in its monthly auctions of two- and five-year notes this week.

Index Extension

Lehman Brothers Inc., which says its U.S. investment-grade bond indexes are used as benchmarks by managers of $2.5 trillion, estimated the duration of its U.S. Treasury Index will increase by 0.21 year when the index is rebalanced Feb. 28. The duration was 4.81 years yesterday.

``It is a fairly large index extension,'' said Lawrence Dyer, U.S. interest-rate strategist in New York at primary dealer HSBC Securities USA Inc. ``That leaves people very reluctant to sell the market going into month-end.''

A sale today of $3.9 billion of new commercial mortgage- backed securities by JPMorgan Chase & Co. pushed the total amount sold this month closer to a record. Analysts at Citigroup Inc. predicted a total of $32 billion for the month, eclipsing the December record of $27.7 billion.

Issuers of CMBS sometimes sell Treasuries or other fixed- rate products as protection against a market decline that would have increased the interest rate on the bonds. Once the mortgage- backed securities are sold, the hedge would be dismantled by buying back the fixed-rate products.

To contact the reporters on this story: Elizabeth Stanton in New York at estanton@bloomberg.net; Annie Pinkert in New York at apinkert@bloomberg.net

Last Updated: February 23, 2007 16:38 EST