TREASURIES-US yields pare gains as jobless claims rise

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Jump in weekly jobless claims likely reflects holiday-related volatility

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Producer price inflation exceeds expectations; services prices moderate

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Fed expected to cut interest rates next week and then pause easing cycle

By Karen Brettell

NEW YORK, Dec 12 (Reuters) - U.S. Treasury yields pared gains on Thursday after data showed that jobless claims rose in the latest week, while producer price inflation came in above economists' expectations but showed some underlying weakness.

"The market reacted to the jobless claims number," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York, adding that "it really is a temporary jump in jobless claims most likely just due to seasonal adjustment issues." Initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 242,000 for the week ended Dec. 7, which likely reflected volatility after the Thanksgiving holiday. U.S. producer prices, meanwhile, rose more than expected in November amid a surge in the cost of food, but a moderation in the prices of services offered hope that the disinflationary trend remains in place.

TD revised its estimate for the Personal Consumption Expenditures Price Index, which is the Federal Reserve's favorite inflation measure, downward on the data, Goldberg said. "A lot of the categories that flow into PCE were actually quite a bit weaker." Consumer price inflation data for November came in line with economists' expectations on Wednesday, which boosted bets that the U.S. central bank will cut rates by a quarter of a percentage point again next week.

The Fed is then expected to pause its rate cutting cycle as it evaluates the outlook for inflation, which is still running above its 2% annual target, and the strength of the labor market.

"Given that the economy is probably going to be doing okay, I think the Fed could decide to keep rates on hold and just wait and assess to make sure that inflation expectations aren't re-accelerating," Goldberg said. "The last thing they want is next year to have to restart the rate hiking cycle because they've missed something."

Key to the Fed's interest rate path next year will be how quickly the Trump administration introduces policies, including possible new tariffs that analysts say could increase inflation.

Benchmark 10-year note yields were last up 1.6 basis points on the day at 4.287%.

Two-year note yields, which are especially sensitive to interest rates, rose 0.2 basis points to 4.159%.

The yield curve between two-year and 10-year notes steepened by around one basis point to 13 basis points.

The U.S. Treasury Department will sell $22 billion in 30-year bonds later on Thursday, the final sale of $119 billion in coupon-bearing supply this week.

The U.S. government saw solid demand for a $58 auction of three-year notes on Tuesday and good interest for a $39 billion sale of 10-year notes on Wednesday. (Reporting by Karen Brettell; Editing by Paul Simao)