The bear market in U.S. Treasuries is just getting started as investors turn their attention to the strengthening labor market and faster inflation instead of the decline in home prices.

That’s the conclusion of economists at Lehman Brothers Holdings Inc., Morgan Stanley, and RBS Greenwich Capital. They estimate 10-year government notes will return 1.28% this year, not even enough to cover inflation. The performance would be the worst since 1999, when they lost 8.25%, Merrill Lynch & Co. index data show.

The combination of an American jobless rate near a six-year low and inflation at the upper end of the Federal Reserve’s comfort zone will keep the central bank from cutting interest rates to halt the decline in home prices, economists at the banks said. Federal fund futures show a 9% probability the Fed will cut its key rate this year. In May, the odds were 100%.

“It isn’t a very appetizing environment” for bond investors, the chief American economist at New York-based Lehman Brothers, who says the Fed will keep its target for overnight loans between banks at 5.25% this year, Ethan Harris, said. “The Fed is stuck in idle.”

Mr. Harris expects two-year and 10-year government debt to yield 5.10% by December 31. Lehman is the fourth-biggest American securities firm by market value.

The yield on the benchmark 47/8% Treasury due in June 2009 rose 12 basis points to 4.98% last week as its price fell 7/32, or $2.19 per $1,000 face amount, to 9925/32, according to bond broker Cantor Fitzgerald LP. The 4.5% note maturing in May 2017 yielded 5.18%, up 16 basis points.