TREASURIES -US yields fall as inflation rise slows in November

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US PCE inflation edges higher in November

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US consumer spending rises last month, though less than expected

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US 10-year yields on track for largest daily fall in four weeks

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US yield curve flattens after PCE data

(Adds new comment, bullets, yield curve, graphic, Fed officials' remarks; updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 20 (Reuters) - U.S. Treasury yields slid on Friday after data showed inflation in the world's largest economy moderately cooled last month, backing the Federal Reserve's interest rate cut of a quarter of a percentage point earlier this week and bolstering expectations of two more rate reductions next year.

Treasuries also drew safe haven bids ahead of a possible partial government shutdown, after more than three dozen Republicans rejected a demand by President-elect Donald Trump to use the measure to lift the nation's debt ceiling.

The benchmark 10-year yield slid 8.2 basis points (bps) to 4.488%, on pace for the largest daily gain in roughly four weeks.

On Thursday, this yield hit a 6-1/2 month high of 4.594% as the market priced in more inflation pressures under a Donald Trump administration in 2025, with tariffs and tax cuts.

On the shorter end of the curve, the two-year yield, which is more sensitive to the policy rates outlook, fell 3.4 bps to 4.285%.

The report showed that monthly inflation slowed in November after showing little improvement in recent months. The personal consumption expenditures (PCE) price index rose 0.1% last month after an unrevised 0.2% gain in October.

U.S. consumer spending, however, rose in November. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew 0.4% last month after a downwardly revised 0.3% gain in October.

"Even with the somewhat favorable core PCE data, the year-over-year number is still 2.8%," said Angelo Manolatos, market strategist, at Wells Fargo in North Carolina. "We think the Fed will remain cautious on rates and inflation at least over the next couple of prints n 2025."

The University of Michigan's consumer sentiment survey for December released on Friday showed that the 12-month inflation outlook was lower than expected at 2.8%, but higher than the 2.6% posted in November.

Following the PCE data, U.S. rate futures have priced in 44 bps of rate easing, or close to two cuts of 25 bps next eyar, LSEG calculations showed. Futures showed just 37 bps of rate reductions in 2025 late on Thursday.

The earliest rate cut is now seen at the March meeting with a 54% probability, LSEG data showed. On Thursday, it showed that the earliest rate move would be June, with a 65% likelihood.

In other parts of the Treasuries market, the U.S. yield curve flattened with the spread between two- and 10-year yields at 21.1 bps, compared with 24.1 bps late on Wednesday. The curve steepened to 27.6 bps on Thursday, the widest gap since June 2022.

Analysts viewed Friday's curve flattening as a healthy retreat from the current steepening trend.

"November inflation was more benign than expected but the stickiness of some categories supports the Fed's hesitancy to materially lower rates next year," wrote Jeffrey Roach, chief economist at LPL Financial, in emailed comments.

"The economy continues to grow from strong consumer demand as income growth and the wealth effect from higher portfolio values give consumers capacity to spend."

In other maturities, U.S. 30-year yields were down 5.6 bps at 4.686%.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci and Alex Richardson)