April 29 (Bloomberg) -- U.S. Treasury 10-year yields held near an eight-month high on concern a report will show faster economic growth is being accompanied by accelerating inflation.

Quicker growth may prompt the Federal Reserve to raise its key lending rate from a 45-year low of 1 percent by September to curb inflation. The Bond Market Association, an industry trade group, recommended the market in Japan close today for a holiday.

``We're still wary of Treasuries, even at these levels,'' said Stephen Miller, director of fixed income at Merrill Lynch Investment Managers in Sydney, which oversees the equivalent of about $3 billion. ``The U.S. is in a stage of meaningful expansion. The Fed is in the game,'' and may raise rates in the third quarter.

The benchmark 4 percent note due in February 2014 was little changed at 96 at 11:55 a.m. in Singapore, according to Cantor Fitzgerald LP. Its yield held at 4.51 percent after rising 14 basis points yesterday. The last time it was so high was Sept. 5. A basis point is 0.01 percentage point.

Yields on the 10-year note may rise to 4.75 percent by the end of June, said Miller, who plans to hold off purchases of U.S. debt until it reaches that level.

Growth, Inflation

The U.S. economy may have grown at a 5 percent annual pace in the first three months of 2004, following a 4.1 percent pace in the fourth quarter, according to the median estimate of 75 economists in a Bloomberg News survey ahead of a Commerce Department report today.

A measure of inflation tied to GDP probably rose at a 2 percent annual pace, compared with a 1.5 percent rise in the fourth quarter, according to the median estimate in another Bloomberg News survey.

The Federal Open Market Committee, the central bank's policy setting group, next meets on May 4. At the last meeting in March, the committee said it can be ``patient in removing its policy accommodation.'' All 76 economists surveyed by Bloomberg News expect the FOMC to leave the overnight bank-lending rate unchanged.

``Interest rates are heading higher, the question is the pace and the driver,'' said Mohamed El-Erian, who helps manage $14 billion of emerging market debt at Pacific Investment Management Co. in Newport Beach, California. ``The pace is determined by policy, and for policy to change, you'll have to see a string of strong employment numbers.''

Employment

The U.S. economy created 308,000 jobs last month, the most since April 2000. The government may report next week the addition of 175,000 jobs this month, based on a Bloomberg News survey of 19 economists.

The number of Americans filing for jobless benefits may have fallen to 343,000 last week, the fourth decline in five weeks, the Labor Department may say today, according to the median estimate of 39 economists.

Treasuries may also fall after a $26 billion sale of two- year notes yesterday was met with the weakest demand in three months, judging by the level of bids submitted. There were $2.11 of bids for every dollar of debt sold, compared with $2.18 at the government's most recent sale on March 24.

So-called indirect bidders, which include foreign central banks such as the Bank of Japan, remained large bidders for the new notes. They bought 42.3 percent of the notes at the sale, compared with 45.2 percent at the previous auction. It's the fourth month indirect bidders have bought over two-fifths of the securities maturing in 2006.

Japan, the largest overseas holder of Treasuries, has put some of the proceeds from yen sales into U.S. government debt. Japan bought $30.3 billion of Treasury notes in February, up from $26.6 billion in January.

`Digestion Issues'

The U.S. is selling debt to finance a widening budget deficit, which has reached $299.5 billion halfway through the fiscal year that ends Sept. 30. The government estimates it will reach $521 billion this fiscal year, versus $374 billion last year.

``Whenever you run budget deficits in that order of magnitude, these digestion issues do raise themselves,'' Miller of Merrill Lynch said.

To contact the reporter on this story: Shamim Adam in Singapore sadam2@bloomberg.net

Last Updated: April 29, 2004 00:28 EDT