By Cordell Eddings April 7 (Bloomberg) -- Short-term Treasury notes gained for a second day as concern rescue plans for Greece may unravel boosted demand for the safest fixed-income assets. Ten-year note yields touched their lowest levels since April 2 before the U.S. sells $21 billion of the securities, the third of four note and bond auctions this week totaling $82 billion. Minutes of the Federal Reserve’s March meeting released yesterday showed policy makers saw an inflation slowdown across the U.S. economy that may persist in the coming months, tempering any need to reverse record-low interest rates. “Treasuries are still benefiting from the sell-off to higher yields and the flight-to-quality bid brought on by Greece,” said George Goncalves, head of interest rate strategy at Nomura Holdings Inc., one of 18 primary dealers that are required to bid at Treasury sales. “If the auction goes well and we rally out, there could be a rally into next week.” The two-year yield fell three basis points, or 0.03 percentage point, to 1.10 percent at 10:59 a.m. in New York, according to BGCantor Market Data. The 1 percent security maturing in March 2012 rose 2/32, or 63 cents per $1,000 face amount, to 99 25/32. The yield on the benchmark 10-year note touched 3.93 percent, the lowest level since April 2, before trading at 3.96 percent. It touched 4.0095 percent on April 5, the highest level since Oct. 16, 2008. “The pressure we have seen is the dealer community setting up for the auction,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “We have a lot of duration that has to be taken down so we are cheapening up some going into the auction. We’ve seen real money buying come in around four percent so Treasuries may have support.” ‘Stage is Set’ The 10-year securities to be offered today yielded 3.97 percent in pre-auction trading, up from 3.735 percent at the previous sale on March 10. Investors bid for 3.45 times the amount of 10-year debt on offer last month. The average at the prior 10 sales including the March 10 issue is 2.87 times. Indirect bidders, the group that includes foreign central banks, bought 35.1 percent of the debt on offer, with the 10-sale average at 40.6 percent. “The stage is set and the 10-year auction is the focus for today’s trading, which means that its importance is not overstated,” Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee. “Today’s success or failure as far as the auction is concerned is directly related to foreign demand for dollar- denominated assets.” Austerity Measures Greece is struggling to tackle a budget deficit that is more than four times the European Union’s three percent limit. The nation may default on its debt as early as this year as austerity measures designed to narrow the European Union’s biggest budget deficit drive the economy into a recession, said Stephen Jen at BlueGold Capital Management LLP. The challenges facing Greece are similar to those that confronted Argentina, which defaulted on $95 billion of debt in 2001, Jen, managing director at the hedge fund, said today in an interview in London. Greek bonds fell for a second day, driving the premium investors demand to hold 10-year securities instead of benchmark German bunds to 407 basis points, the most since 1998. Market News International said yesterday the country wants to bypass International Monetary Fund involvement in any EU-sponsored rescue because terms for aid would be too stringent. A Greek government spokesman denied the nation aims to exclude the IMF. ‘Extended Period’ Treasuries rose yesterday as the Fed said its pledge to keep the main rate low for an “extended period” wouldn’t keep it from taking action when needed to keep inflation in check, according to minutes of the March 16 Federal Open Market Committee meeting released yesterday. A few officials warned of the risks of increasing borrowing costs too soon. Fed Chairman Ben S. Bernanke is scheduled to speak about economic challenges at 1:30 p.m. in Dallas. Interest-rate futures on the CME Group Inc. exchange show a 59 percent chance U.S. policy makers will raise the benchmark target rate by at least 25 basis points by November, compared with 60 percent a day ago. Treasury Secretary Timothy F. Geithner said in an interview with Bloomberg Television in Mumbai today that some of the recent increase in Treasury yields on can be attributed to “fundamental” improvements in the economic outlook. ‘Natural Healthy Process’ “You’re seeing a natural healthy process of confidence restored,” Geithner said. He added that President Barack Obama’s administration wants to start cutting the fiscal deficit next year. “We’re committed to that,” he said. Obama has increased U.S. marketable debt to a record $7.41 trillion to fund spending programs. At the same time, data indicate the economic recovery is gaining pace, damping appetite for the safety of government debt. The Treasury is scheduled to sell $13 billion of 30-year bonds tomorrow. It auctioned a record-tying $40 billion of three-year debt yesterday and $8 billion in inflation-protected notes on April 5. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net.

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