July 12 (Bloomberg) -- The U.S. 10-year Treasury note may fall for the first week in five as government reports show more signs of inflation, which erodes the value of fixed-income payments.

Ried, Thunberg & Co.'s index on the outlook for the security was unchanged at 41 on Friday from a week earlier. A reading below 50 means investors expect the note's price to decline by October. The 54 investors polled by the Westport, Connecticut- based bond research firm manage a combined $1.37 trillion.

A rally in Treasuries has slowed, with investors reluctant to push prices higher before this week's reports on consumer, producer and import prices. The government may say Friday its consumer price index rose 1.9 percent in June from a year earlier, the most since January 2003, according to the median estimate of 5 economists surveyed by Bloomberg News.

"All eyes will be on those inflation reports,'' said Colin Lundgren, 39, who oversees investment strategy for $100 billion of bonds at American Express Financial Corp. in Minneapolis and is a survey participant. "As giddy as bond investors may be in the short term, those reports may be a rude awakening.''

Last week, the 4 3/4 percent note maturing in May 2014 was little changed at 102 5/16 to yield 4.46 percent, according to bond broker Cantor Fitzgerald LP. The yield, which moves inversely to the note's price, is down from this year's high of 4.90 percent reached in May.

The inflation reports may give investors and traders clues as to the size and pace of interest-rate increases by the Federal Reserve. The central bank said on June 30 when it raised its target rate for overnight loans between banks to 1.25 percent from 1 percent that future boosts will be "measured.''

Faster Inflation

"We'll know a lot more after we get the inflation data,'' said Andrew Lombara, 34, head of government bond trading in New York at HSBC Securities USA Inc., one of 22 primary U.S. government securities dealers that trade with the Fed's New York branch.

The import price index is slated for Wednesday, followed by the producer price index Thursday.

Economic growth and rising oil prices will spur inflation to as much as 3 percent in the final three months of 2004 from a year earlier, according to the median forecast of 51 economists surveyed from June 25 to July 6 by Bloomberg News.

"The gas pedal has been depressed far too long given where we are in the business cycle,'' said Todd Finkelstein, 44, who oversees $2 billion as head of fixed income at Boston's Boston Advisors Inc. He isn't a Ried, Thunberg survey participant.

Even without faster inflation, yields should be higher than they are now, Finkelstein said. He said the 10-year note yield may rise to 5.5 percent this year as investors demand at least 2.5 percentage points more than the rate of inflation.

Subtracting the 1.7 percent core consumer price inflation rate through May, 10-year notes yield 2.76 percent. In the decade ended December 2003, the so-called real yield was 3.25 percent.

Fed Meetings

The Fed has four meetings left this year, with the next being Aug. 10. Ried, Thunberg's survey found 53 percent of investors think the odds the Fed won't raise rates at one of the meetings exceed 50 percent. Forty-seven percent put the odds at 40 percent or less.

The pace of increases was thrown into doubt after the government said on July 2 that the economy created 112,000 jobs in June, less than the 250,000 median forecast.

"Payrolls basically vindicated the idea that the Fed can take a measured approach,'' consisting of quarter-point rate increases at each of this year's meetings, said Dominic Konstam, head of interest-rate strategy in New York at Credit Suisse First Boston LLC, another primary dealer. Konstam, 39, didn't participate in the Ried, Thunberg survey.

The Fed, which also meets in September, November and December, will likely raise its target rate to 2 percent by the end of the year, according to the median estimate of 55 economists surveyed by Bloomberg News from June 25 to July 6.

Long-Term Outlook

Larger-than-expected increases in consumer prices "would be the catalyst that may get the Fed moving a bit more aggressively than the market expects,'' said American Express's Lundgren.

The firm's portfolios are avoiding debt that matures in two to five years, which will bear the brunt of the losses as the Fed raises its target rate, Lundgren said.

Ried, Thunberg's index on the outlook for the 10-year note by year-end fell to 38 from 40. The index, whose record low is 36 in April, has fallen from 46 in March. The firm is a unit of London-based ICAP Plc, the world's largest inter-dealer broker.

Treasuries and debt of companies such as Fannie Mae and Freddie Mac made up 33 percent of portfolios, up from 28 percent the prior week, according to Ried, Thunberg's survey. Corporate and sovereign bonds were 29 percent, down from 33 percent, and mortgage-backed debt rose to 28 percent from 26 percent.

Futures Traders

Futures traders' bets that the note's price will fall held near an all-time high last week. Bets by hedge funds and other large speculators on a decline minus their bets on a gain -- so- called net shorts -- were 192,000 as of Tuesday, compared with a record 203,000 a week earlier. The average this year is a net short position of about 98,000.

Futures are agreements to buy or sell assets at a set price and date. The data are included in a weekly report from the Washington-based Commodity Futures Trading Commission on Fridays.

Also this week, investors and traders will get the latest reading on retail sales. On Wednesday the Commerce Department may say sales fell 0.7 percent in June, according to the median estimate of economists surveyed by Bloomberg News.

Last month's report, which showed a 1.2 percent surge in sales for May, sparked a more than 1/2-point drop in the 10-year note that pushed its yield up 7 basis points to 4.87 percent. A basis point is 0.01 percentage point.

"The bigger risk is the consumer will continue to be rather soft the next few months,'' Credit Suisse's Konstam said.

The 10-year note yield may drop to 4.25 percent if investors adopt the view the economy isn't strong enough to withstand rate increases by the Fed, he said.

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