March 31 (Bloomberg) -- Treasury benchmark 10-year notes fell for a second week as Federal Reserve Chairman Ben S. Bernanke described inflation as his primary challenge, while saying risks to economic growth are multiplying.

Two-year notes rose, pushing yields on the securities lower than those on benchmark notes by the most since June, as investors sold longer-maturity debt on concern consumer prices may increase. The central bank's preferred inflation measure accelerated last month, a government report showed yesterday.

``Inflation is a bigger concern than recession,'' said Andy Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank's personal asset-management division. ``We've been cautious on the bond market. We think it got ahead of itself.''

The 10-year note's yield rose 3 basis points, or 0.03 percentage point, to 4.64 percent this week. The price of the 4 5/8 percent security maturing in February 2017 fell 7/32, or $2.19 per $1,000 face amount, to 99 27/32.

Bernanke, while testifying before Congress' Joint Economic Committee on March 28, said ``the level of core inflation remains uncomfortably high.''

The Federal Open Market Committee removed its tilt toward higher interest rates at its March 21 meeting when it held borrowing costs unchanged at 5.25 percent. It ended a series of 17 quarter-percentage point increases in June.

`Concerns About Inflation'

``The change in the FOMC statement arguably signaled that while they restated their concerns about inflation, truly their predominant concern may lie on the downward risk for growth,'' said Wan-Chong Kung, who helps oversee $36 billion in fixed income at FAF Advisors in Minneapolis, the asset-management arm of U.S. Bancorp.

Interest-rate futures contracts suggest traders foresee a 28 percent likelihood the Fed will reduce its target lending rate to 5 percent by midyear, unchanged from a week ago.

``There's a lot of easing baked into the cake,'' said Larry Dyer, an interest-rate strategist at HSBC Securities USA in New York, one of the 21 primary U.S. government securities dealers that trade with the central bank. ``People have to get used to the idea that the Fed expects to be on hold for a considerable period of time.''

`Strike Iran'

U.S. government debt, favored by investors as a store of value in times of international strife, temporarily surged yesterday as a report by Web site Debkafile circulated. The site, which identifies itself as a Jerusalem-based news organization, reported that U.S. military officers advised American investors to leave Bahrain amid a standoff between the U.K. and Iran. The information was attributed to unidentified ``U.S. financial sources.''

The White House denied the report, though investors and traders remained focused on tensions in the Middle East.

``You're seeing a market becoming increasingly concerned about whether we're going to strike Iran,'' said Rick Klingman, head of U.S. Treasury trading at ABN Amro Inc. in New York.

Concern about a broader Middle East conflict is rising after Iran on March 23 seized 15 U.K. sailors and Marines it said entered Iranian waters illegally. Britain says the troop boats were in Iraqi waters. Iran is under United Nations sanctions after refusing to end uranium enrichment for a nuclear program Western countries say is being used to develop weapons. The U.S. and the U.K. also accuse Iran of supporting attacks in Iraq.

Business Barometer

Treasuries initially declined yesterday after a surge in a gauge of business activity.

The National Association of Purchasing Management-Chicago said its business barometer rose to 61.7 this month, from 47.9 in February. The median forecast of 57 economists surveyed by Bloomberg News was 49.3. Readings below 50 signal contraction.

A manufacturing gauge to be released April 2 by the Institute for Supply Management is forecast to decline to 51.1 in March, from 52.3 in February. It was below 50 in November and January for the first time since 2003.

The Commerce Department's price index for consumer spending on items excluding food and energy rose 0.3 percent in February. While the gain exceeded the 0.2 percent median forecast of economists surveyed by Bloomberg News, January's increase was revised down to 0.2 percent from 0.3 percent.

The price gauge rose 2.4 percent from a year earlier, compared with a revised 2.2 percent in January. The year-on-year rate hasn't been below 2 percent since March 2004.

Fed policy makers have said they want to see annual inflation in the 1 percent to 2 percent range.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

Last Updated: March 31, 2007 08:50 EDT