TREASURIES-US yields modestly higher as strong data raises odds rate cut pause

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US retail sales rise more than expected

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US import prices advance unexpectedly

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US yield curve steepens

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US 10-year yield hits highest since late May

(Adds analyst comments, graphic, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Nov 15 (Reuters) -

U.S. Treasury yields edged higher on Friday, coming off earlier highs that were fueled by data showing retail sales rose more than expected last month and import prices increased in the world's largest economy.

The reports increased the possibility that the Federal Reserve could pause cutting interest rates at next month's policy meeting.

The benchmark 10-year yield inched 1 basis point (bp) to 4.429%. It hit 4.505% earlier in the session, a 5-1/2-month high, in the wake of strong economic data. On the week, the 10-year yield gained 12 bps.

U.S. two-year yields, which reflect interest rate expectations, were slightly up at 4.305%, rising to 4.379% earlier, the strongest level since late July. The yield was up 4.9 bps for the week.

Data showed U.S. retail sales rose 0.4% last month after an upwardly revised 0.8% advance in September. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, climbing 0.3%.

"The big story in the retail sales data was not the October results but rather the huge upward revisions to September which now show a huge 0.8% (month-on-month increase). It was up 0.4% in the initial release," wrote Dave Rosenberg, founder and chief executive officer at Rosenberg Research, in a note.

"Watch for a growing chorus of FOMC (Federal Open Market Committee) officials preparing us further for a policy pause at the December meeting, barring a disastrous employment release."

U.S. import prices, on the other hand, unexpectedly increased in October due in part to higher prices for fuels and other goods, suggesting inflation has stalled. Import prices were up 0.3% last month after an unrevised 0.4% decline in September.

Economists polled by Reuters had forecast import prices, which exclude tariffs, slipping 0.1%. In the 12 months through October, import prices increased 0.8% after dipping 0.1% in September.

Data on import prices followed gains in both consumer and producer prices earlier this week, suggesting that inflation remains sticky even with the Fed in the middle of an easing cycle.

U.S. rate futures have reduced the odds of a 25-bp rate cut at next month's policy meeting to 61%, compared with 63.2% late on Thursday, according to LSEG calculations.

The chances of a pause in rate cuts, on the other hand, increased to 39% from 37% the previous session. For 2025, futures have implied another 44 bps in rate reductions, down from 47 bps in the previous session.

"The Fed has probably a few more cuts to go before they're kind of done in this cycle," said Pramod Atluri, principal investment officer of the Bond Fund of America, which is part of the Capital Group.

"That's where we're at. We're still trying to determine whether the promise of faster growth and stickier inflation will come to pass."

In other maturities, U.S. 30-year yields firmed 2.7 bps to 4.611%.

The U.S. yield curve steepened after Friday's data, with the gap between two-year and 10-year yields at 13.1 bps , up from 8.6 bps on Thursday. The gap was 19.5 bps on Nov. 6, a day after the election.

The steepening of the curve suggested that the market is still pricing in rate cuts next month and some in 2025, with yields on the short end under control.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis and Marguerita Choy)