The combination of record American home foreclosures, rising defaults, and simmering inflation is making two-year Treasury notes and their equivalents unbeatable in the bond market.

Anxiety over the $300 billion owed by structured investment vehicles, or SIVs, is pushing investors into the relative safety of two-year notes sold by the government and the most creditworthy companies at the same time that rising consumer prices reduce the appeal of 10-year securities. The gap in yields between the bonds is getting wider, reminiscent of 2001, when the Federal Reserve began cutting its target interest rate for overnight loans between banks. Strategists at firms that trade directly with the central bank said the yield curve represented by the gap between yields on two- and 10- year government notes will steepen as the economy slows and forces policy makers to cut borrowing costs a second time this year. UBS says the spread may widen to 2.50 percentage points from the current 0.61 percentage point within two years.