June 5 (Bloomberg) -- U.S. Treasuries declined after Federal Reserve Chairman Ben S. Bernanke suggested the central bank won't pause in its two-year cycle of interest rate increases at this month's policy meeting.

Bernanke said recent increases in measures of inflation ``are unwelcome'' and he will ensure the trend isn't sustained, at a banking group's conference. Futures traders raised bets the central bank will raise borrowing costs to 5.25 percent later this month, three days after a jobs report indicating the economy slowed more than forecast prompted them to pare expectations.

``He's telling you inflation concerns are tipping the scale toward raising rates,'' said Raymond Remy, head of fixed income at Daiwa Securities America Inc. in New York.

The benchmark 10-year note's yield, which moves inversely to its price, rose about 3 basis points to 5.02 percent at 5 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 5 1/8 percent note maturing in May 2016 fell 7/32 or $2.19 per $1,000 face amount, to 100 13/16.

Yields on two-year notes rose almost 7 basis points to 4.98 percent. The price of the 4 7/8 percent note maturing in May 2008 fell 1/8 to 99 13/16.

The Fed ``will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained,'' Bernanke said in remarks to a panel at the American Bankers Association International Monetary Conference in Washington. He was on a panel with European Central Bank President Jean-Claude Trichet and Bank of Japan Deputy Governor Toshiro Muto.

Fed Futures

``These are hawkish statements on the part of Bernanke,'' Gerald Lucas, head of U.S. Treasury strategy at Banc of America Securities LLC in New York. The firm and Daiwa are among the 22 primary U.S. government securities dealers that trade with the New York Fed. ``This makes it appear the Fed's going to 5 1/4 for June. They do not appear to be complacent.''

The yield on July futures on the Fed funds rate was about 5.19 percent, pricing in a 72 percent chance of a quarter-point increase in June, up from 48 percent odds before Bernanke spoke.

Yields on July Fed futures were signaling a 72 percent chance of a quarter-percentage point increase this month the day before the June 2 employment report showed the economy created 75,000 jobs last month, below the 170,000 forecast in a Bloomberg survey of economists.

Following the report, yields plunged by 11 basis points to 4.99 percent, the biggest drop in 18 months, and closed lower than the Fed's target rate for the first time since April 2001.

Futures traders ``wiped out all the employment gains completely and they think the Fed's going again,'' said Scott Gewirtz, head of Treasury note and bond trading in New York at Lehman Brothers Inc., a primary dealer.

Inflation, Growth

A report today showed growth slowed in the U.S. service industries last month. The Institute for Supply Management's index of non-manufacturing businesses fell to 60.1 in May, from 63 a month earlier. The median estimate of economists surveyed by Bloomberg was for a reading of 60. Readings greater than 50 signal expansion.

Reports next week may ease pressure on the U.S. central bank to raise rates further after lifting borrowing costs at its last 16 meetings to a five-year high.

The consumer price index may show prices paid by U.S. consumers rose 0.4 percent in May, down from 0.6 percent the previous month, according to the median forecast of economists surveyed by Bloomberg. The report is due June 14.

The spread between 2-year and 10-year yields declined to the smallest in almost two months after Bernanke spoke. The so-called yield curve narrowed to 5 basis points, the lowest the since April 3.

``The market senses the Fed may push up interest rates again, pushing up short-term rates,'' said Tony Crescenzi, chief fixed-income market strategist at Miller, Tabak & Co. in New York. ``When long-term rates are steady, it shows inflation expectations are kept down.''

The Treasury announced today it will reopen its May 11 sale of $13 billion in 10-year notes. It will auction $8 billion of the securities.

About $250.7 billion of Treasuries traded today through ICAP Plc, the world's largest broker of trades between banks, compared with the three-month daily average of $265.1 billion.

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

Last Updated: June 5, 2006 17:09 EDT