TREASURIES-US yields fall as inflation takes backseat to economic growth concerns

(Adds analyst's comment, updates for market close in paragraphs 11-12, 14-17)

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US inflation data sticky but matches estimates

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Bond market reaction muted as economic concerns prevail

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Bets on 25-basis-point Fed rate cut next month rise

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Seven-year auction meets good investor demand

By Davide Barbuscia

NEW YORK, Nov 27 (Reuters) - U.S. Treasury yields dropped on Wednesday as investors piled into U.S. government bonds following weak consumer sentiment surveys in Europe, while U.S. inflation concerns took a temporary backseat as data came in line with estimates.

Amid a flurry of economic data, the highlight on Wednesday was the Personal Consumption Expenditures price index, which matched expectations with a 0.2% monthly increase and a 2.3% annual rise. Core PCE, which strips out volatile food and energy items and is the Federal Reserve's preferred gauge of inflation, was also in line with estimates. While inflation remained elevated and above the Fed's 2% target, the bond market reaction was muted ahead of the Thanksgiving holiday on Thursday.

"Inflation is fading as an issue as investors shift to cyclical growth," said David Russell, global head of market strategy at TradeStation.

Concerns about a rebound in inflation resurfaced this week after President-elect Donald Trump pledged to impose punitive tariffs on imports from Canada, Mexico, and China.

"It used to be the economy and then the election ... And now it's still the economy," said Jack McIntyre, global fixed income portfolio manager at Brandywine Global.

"And if you look at the economy ... The Fed may cut, even if it's going to be a hawkish cut," he said, referring to the U.S. central bank's next rate-setting meeting in December.

Treasury yields, which move inversely to prices, declined after data on Wednesday showed German consumer sentiment dropped more than expected and French consumer confidence fell to a five-month low in November. U.S. gross domestic product growth remained unchanged at 2.8% in the third quarter, according to an updated estimate released on Wednesday, although there was a slight downward revision to consumer spending. The Labor Department reported that the number of Americans continuing to collect unemployment claims rose to 1.9 million, suggesting many laid-off workers are finding it difficult to land new jobs. "Given the broad consensus-like reading across the slew of economic data releases today, we do not see any meaningful impact on the Fed's upcoming rate decision in December," said Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors.

"We still believe that a 25-basis-point reduction to the policy rate is extremely likely," he said. Rates futures traders were assigning a 70% probability to a 25-basis-point rate cut by the Fed next month, CME Group data showed on Wednesday, up from a 59% chance on Tuesday. Benchmark 10-year yields were last at 4.234%, nearly seven basis points lower than on Tuesday and at their lowest level since Nov. 1. Two-year yields dropped by more than four basis points to 4.21%, the lowest level in more than two weeks. Further out, 30-year yields stood at 4.419%, the lowest level since Nov. 7.

On the supply front, the Treasury sold $44 billion in seven-year notes with a high yield of 4.183%, about one and a half basis points below the market at the time of the bidding deadline, suggesting investors were willing to pay up to absorb the issuance.

The sale followed two- and five-year note auctions this week that were also met with solid market demand.

(Reporting by Davide Barbuscia; Editing by Paul Simao)