TREASURIES-Yields dip after cool PPI

NEW YORK, Oct 11 (Reuters) - U.S. Treasury yields briefly ticked lower early on Friday after a report showed producer prices were flat in September, avoiding an inflation curve ball for the Federal Reserve before it must decide how much more to ease at its next meeting.

The unchanged reading in the Producer Price Index for final demand last month followed an unrevised 0.2% gain in August, the Labor Department said on Friday. Economists polled by Reuters had forecast the PPI edging up 0.1%. In the 12 months through September, the PPI increased 1.8% after climbing 1.9% in August.

The data followed news on Thursday that consumer prices rose slightly more than expected in September, lifted by higher food costs. The two reports supported views that the Federal Reserve would cut interest rates again, after September's aggressive 50-basis point reduction.

Yields soon after reversed. The yield on benchmark U.S. 10-year notes was up 2.2 basis points from late Thursday at 4.116%.

The 30-year bond yield rose 3.4 basis points to 4.4193% and the 2-year note yield, which typically moves in step with interest rate expectations, was off 1.6 basis points at 3.983%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 13.1 basis points, steeper than late Thursday's +10.2 bp.

Based on the fed funds futures term structure, traders see an 82% chance of a 25 bps ease in the policy rate, which has been in a 4.75%-5.0% target range since the Fed cut last month, at the central bank's November meeting. The odds for a quarter-point cut were 85% late Thursday.

(Reporting by Alden Bentley; Editing by Andrea Ricci)