TREASURIES-Yields firm in thin trade before 7-year auction

By Alden Bentley

NEW YORK, Dec 26 (Reuters) - The yield on the benchmark U.S. Treasury note rose to an eight- month high in thin holiday trade on Thursday, shaking off weekly data showing a solid employment picture that should allow the Federal Reserve to adopt a less dovish stance in 2025.

Claims for unemployment insurance were 219,000 in the latest week, less than the previous period's 220,000 and economists' forcasts for 224,000.

The main event of the day looks like the seven-year note auction after noon. Otherwise no one wants to trade when so few investors are participating the day after Christmas, and numerous financial centers, including London, remained closed.

The 10-year yield was up 4.6 basis points from late Tuesday, before the Christmas holiday, at 4.633%. It hit 4.641%, the highest level since May 2. The yield on the 30-year bond was 4.7 basis points higher at 4.807%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 3.1 basis points to 4.361%.

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 27.0 basis points, steeper than Thursday's late spread at +24.8 bp.

Based on the fed funds futures term structure, traders see minimal chance that the Fed will ease at it's January meeting, after delivering a quarter point cut earlier this month. That brought the fed funds target to 4.25%-4.50% and was it's third since it became more accomodative in September, after leaving its target rate at 5.25% to 5.50% since July 2023.

Fed officials cite strong employment, solid growth and slow progress lowering inflation to its 2% target as possible reasons to let up on the easing. So, markets are pricing accordingly.

In fact the 10-year TIPS breakeven rate was last at 2.362%, indicating the market sees inflation averaging just under 2.4% a year for the next decade. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.420%

According to LSEG data, traders don't see another interest rate reduction until May and see a less than 50/50 chance of another 25 basis points from there by year end. (Reporting by Alden Bentley; Editing by Alistair Bell)