The declines pushed 10-year notes to their biggest drop since May 7 and come as Federal Reserve officials including Chairman Alan Greenspan suggest they will keep raising benchmark interest rates gradually in coming months. ``Transitory'' reasons such as higher energy prices have been behind a boost in inflation, Greenspan said last week.

``The market expects inflation to moderate and the desire for inflation protection is not as strong as it was a couple of months ago,'' said James Evans, who manages $1.6 billion of Treasury Inflation-Protected Securities at Brown Brothers Harriman & Co. in New York.

The 4 3/4 percent Treasury note maturing in May 2014 fell 1 point, or $10 per $1,000 face amount, to 101 1/32 at 5 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The note's yield rose 0.13 percentage point to 4.61 percent. Ten-year inflation-linked debt fell almost a point, to yield 2.16 percent.

Traders sold Treasuries after the Conference Board said its consumer confidence index rose to 106.1 for July from a revised 102.8 in June. It was expected to be 102, according to the median estimate of economists surveyed by Bloomberg News.

The figure ``highlights the overall healthy state of the economic environment; it is one more piece of information that gives the market a reason to drift lower,'' said Anthony Karydakis, senior financial economist in Chicago at Banc One Capital Markets.

Longer Maturity

Today's sale of 20-year TIPS was the longest maturity debt the government has sold since halting 30-year bond sales in 2001. Treasuries were down about half a point before the government sold the bonds at a yield of 2.47 percent, compared with the 2.43 percent yield forecast on average by four bond trading firms surveyed by Bloomberg News. The bonds, which mature in January 2025, yielded 2.48 percent in post-auction trading.

``It's a lot of duration for people to take down,'' said Mark Spindel, who manages about $13 billion of debt securities as chief investment officer of International Finance Corp., an arm of the World Bank in Washington. Longer-duration securities fall more in price as yields rise.

The question comes down to ``do you feel the Fed is hiking quickly enough to keep inflation at bay,'' Spindel said. TIPS are ``the right investment,'' he said.

Inflation Peg

The bid-to-cover ratio, a measure of demand, was 1.49, meaning there were $1.49 in bids for each dollar offered, the lowest for an auction of TIPS since 2002. The ratio on a July 10- year TIPS sale was 1.89, and April's sale was 1.78.

Inflation-linked debt pays interest at lower rates than regular Treasuries on a principal amount that grows as consumer prices rise. The Labor Department earlier this month said its index of consumer prices for June, minus food and energy, rose 0.1 percent, half the median forecast of economists surveyed by Bloomberg News. Overall consumer prices gained 3.3 percent from a year earlier, the most since May 2001.

Declining inflation while the Fed is raising interest rates ``isn't an environment to buy TIPS,'' said David Boberski, head of interest-rate strategy in New York at Bear Stearns & Co., one of the 22 primary government securities dealers that trade with the Fed's New York branch.

The Treasury will sell $24 billion of two-year notes tomorrow, in the smallest two-year sale since December 2001.

Level Triggered

A decline past the 101 28/32 level in the benchmark 10-year note exacerbated today's losses, said Lundy Wright, head of government bond trading in New York at Nomura Securities International Inc., also a primary dealer. The level was the security's intraday low dating back to July 6.

``The combination of it all is getting people to sell,'' Wright said.

Ten-year yields have risen almost a quarter-point in the past week, after Greenspan said in congressional testimony last week that an economic slowdown in June should prove short-lived.

The Fed's overnight lending rate between banks is still ``highly accommodative,'' Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and a voter on the Fed's rate-setting Open Market Committee, said in Denver yesterday.

December Eurodollar futures yielded 2.49 percent, up from 2.395 percent Friday, a sign traders see the Fed's key rate reaching 2.25 percent by early 2005. The contract settles at a three-month lending rate that has averaged about 0.22 percentage point above the Fed's target in the past 10 years.

Durables

The percentage of investors expecting a decline in U.S. Treasury note prices rose to a two-month high, according to a weekly poll of clients by J.P. Morgan Chase & Co. Fifty-one percent expected lower prices, up from 38 percent the previous week. In May, the share looking for lower prices reached 54 percent, the highest since the survey began in 1992.

Orders for U.S. durable goods in June probably rose 1.5 percent after a 1.8 percent fall in May, economists in a Bloomberg News poll expect the government to say tomorrow. On Friday, the National Association of Purchasing Management-Chicago is projected to report its index of manufacturing in the Chicago area rose to 60 in July from 56.4. Readings greater than 50 signal expansion.

The Fed raised its interest-rate target last month by a quarter-point to 1.25 percent, the first boost since 2000. The next policy meeting is on Aug. 10, followed by three more this year.

Ten-year Treasuries yielded about 1.83 percentage points above two-year notes. The difference yesterday shrank to 1.78, the least since September 2002. Today was the first time the difference has widened since July 8.