Feb. 23 (Bloomberg) -- U.S. 10-year Treasury notes rose the most in two weeks after the government said consumer prices climbed less than forecast in January.

The report comes less than a week after the government said a measure of wholesale prices increased the most in six years last month, contributing to the biggest weekly drop in 10-year notes since May. Inflation erodes the value of a bond's fixed payments.

``Inflation is not an emergency,'' said Ralph Axel, fixed- income strategist in New York at HSBC Securities USA Inc., a unit of Europe's largest bank by market value. Today's report puts a decline in bonds ``on hold at least for another month. There's been a pretty big buildup of inflationary fears going into this number,'' he said.

The benchmark 4 percent note maturing in February 2015 gained about 1/4, or $2.50 per $1,000 face amount, to 97 29/32 at 1 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield fell 3 basis points, or 0.03 percentage point, to 4.26 percent, the biggest decline since Feb. 9. The note initially rose more than 1/2 of a point.

The 10-year yield is likely to remain between 4.10 percent and 4.40 percent in the coming weeks, Axel said. HSBC is also one of the 22 primary U.S. government securities dealers that trade with the Federal Reserve's New York branch.

Consumer Prices

The Labor Department's consumer price index increased 0.1 percent. Economists expected a 0.2 percent gain, based on the median of 71 estimates in a Bloomberg survey. Excluding food and energy, prices rose 0.2 percent, in line with the median estimate. The index climbed 2.3 percent from a year earlier, up from the 2.2 percent increase in December.

``The Fed doesn't have to increase the pace'' at which it has been raising its target for the overnight lending rate between banks, said Joseph Shatz, a government bond strategist at Merrill Lynch & Co. in New York, a primary dealer.

Fed policy makers have increased their target for the overnight lending rate between banks by a quarter percentage point at all six of their meetings since June, bringing it to 2.5 percent on Feb. 2 from an almost 46-year low of 1 percent.

The central bank will release the minutes of its Feb. 2 meeting today at 2 p.m. in Washington. Last week, Fed Chairman Alan Greenspan told Congress that the central bank's benchmark interest rate, adjusted for inflation, is still low.

Ten-year yields rose 8 basis points on Jan. 4, the day the minutes of the Fed's Dec. 14 meeting showed policy makers concluded interest rates were too low to prevent inflation from quickening.

TIPS

Treasury inflation-protected securities, or TIPS, lagged behind regular Treasury notes. TIPS pay interest at lower rates than regular Treasury notes on a principal amount that increases with the consumer price index.

The margins by which regular Treasury yields exceed TIPS yields, representing the average expected inflation rate over the life of the notes, narrowed. The so-called breakeven rate for 10- year TIPS shrank to 2.60 percent from a one-month high of 2.62 percent as the TIPS yield declined less than the regular 10-year Treasury yield.

Optimism inflation would remain tame helped push the 10-year note's yield below 4 percent for the first time since October two weeks ago. The yield was 4.18 percent on Jan. 18, the day before the last consumer price report, which showed prices unexpectedly fell in December. The high this year was 4.31 percent on Jan. 4.

Ten-year yields then rose 18 basis points last week as the Labor Department's Feb. 18 report showed core wholesale prices rose 0.8 percent.

`Stay of Execution'

``To the extent those broad-based increases continue in the PPI, that augurs poorly for the CPI,'' said David Petrosinelli, part of a group that manages $5 billion of bonds at Shay Assets Management in Chicago. Today's CPI report ``gives us a one-month stay of execution till next month's number,'' he said.

Expecting inflation will accelerate this year, Petrosinelli has sold Treasuries maturing in 10 years or more and bought five- year notes, which will fare better as yields rise.

The yield on the benchmark 10-year note exceeds the rate of inflation as measured by the consumer price index by about 1.2 percentage point. Over the past decade, it averaged 2.9 percentage points higher.

Greenspan, presenting the central bank's semiannual report on the economy and monetary policy to Congress last week, said declines in 10-year debt yields in the U.S. and globally in recent months as the Fed raised its benchmark interest rate, were ``a conundrum.''

Guynn

Investors will also focus on a speech on the outlook for the U.S. economy by Jack Guynn of the Fed's Atlanta branch today. The speech is scheduled to start at about 1:40 p.m. in Birmingham, Alabama.

Ten-year yields fell below 4 percent on Feb. 9 after comments by Guynn to the Wall Street Journal boosted speculation the central bank is preparing to slow the pace of rate increases. Guynn told the paper that ``it's not quite as clear how much more'' interest rates need to rise.

Treasuries were rising before the report after Japan's Ministry of Finance and the Bank of Korea said they have no plans to reduce their dollar-denominated assets, and Taiwan's central bank said it hasn't sold the U.S. currency.

The statements came one day after the Bank of Korea said it planned to increase its non-dollar reserves, and they eased concern central-bank demand for Treasuries may wane. The Federal Reserve's holdings of Treasuries for foreign central banks and international accounts totaled $1.057 trillion in the week that ended Feb. 16.

``To the extent that Asian central banks aren't voting with their feet and selling dollars, this is a prop for Treasuries,'' said Marc Ostwald, a fixed-income strategist in London at Monument Securities.

The Bank of Korea, which has the world's fourth-largest foreign currency reserves, said in a statement today that there will be no short-term change in its $200 billion of holdings and it isn't currently selling dollars. Investors in the country, including the central bank, held $69 billion of U.S. debt at the end of December, according to most recent Treasury data.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net