TREASURIES-US yields mostly down after inflation, jobless claims data

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U.S. inflation annual rise smallest since February 2021

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U.S. jobless claims rise in latest week

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U.S. yield curve steepens post-data

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U.S. rate futures price in 91% chance of 25-bp cut in November

(Updates throughout with new comment, jobless claims data, bullets, latest prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 10 (Reuters) - U.S. Treasury yields were mostly lower on Thursday in volatile trading after data showed an increase in weekly jobless claims and an annual rise in inflation that was the lowest since February 2021, keeping the Federal Reserve on track to cut interest rates at the November policy meeting.

U.S. benchmark 10-year yields were last up 1.1 basis points (bps) at 4.079%, after hitting new 10-week high of 4.12% immediately following the inflation data.

The two-year yield, which is more sensitive to Fed policy expectations, fell 4.7 bps to 3.972%. Earlier in the session, it rose to 4.094%, the highest since mid-August.

Data showed that the consumer price index increased 0.2% last month after posting the same gain in August. In the 12 months through September, the CPI climbed 2.4%, the smallest year-on-year rise since February 2021 after a 2.5% rise in August.

Excluding the volatile food and energy components, the CPI increased 0.3% in September after rising 0.3% in August. In the 12 months through September, the so-called core CPI advanced 3.3%. That followed a 3.2% rise in August.

"Disinflation continues, but anyone who thought the Fed was going to lower rates by another 50 basis points in November is dead wrong," said Jamie Cox, managing partner for Harris Financial Group in Richmond, Virginia in emailed comments.

"When interest rates aren't high enough to lower growth, they aren't high enough to stifle inflation completely either. The Fed will lower rates, but at a measured pace from here."

U.S. initial jobless claims, on the other hand, grew 33,000 last week to a seasonally adjusted 258,000 for the week ended Oct. 5, data showed, due in part to the impact of Hurricane Helene and the dockworkers' strike.

Following the data, the U.S. rate futures market on Thursday factored in a 91% chance of a 25-bp rate cut at the November meeting, and 9% chance of a pause, higher than the 17% seen on Wednesday, according to LSEG calculations.

The futures market also showed about 49 bps of easing this year, down from more than 50 bps early this week. It also priced in about 96 bps of Fed cuts in 2025, which was a sharp drop from the roughly 200-250 bps reductions estimated prior to last Friday's blockbuster U.S. nonfarm payrolls report. That jobs data has reset Fed easing expectations.

The U.S. yield curve, meanwhile, steepened after the data, with the spread between two-year and 10-year yields widening to as much as 10.6 bps. It was last at 10 bps.

Steepener trades, which involve increasing long bets on the shorter-end of the curve while reducing exposure in longer-dated maturities, are popular whenever the Fed embarks on an easing cycle. Investors buy the short end of the curve on the expectation that their yields have peaked and will decline as the Fed cuts rates. (Reporting by Gertrude Chavez-Dreyfuss Editing by Christina Fincher)