TREASURIES-Yields edge higher after gains on strong Q2 economic data

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Yields inch higher after economic data surprises to upside

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Market awaits jobs numbers, other Q3 data, for Fed's rate path

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Treasury to auction $44 billion in seven-year notes in afternoon

(Updates throughout with latest market activity, adds comments in paragraphs 13, 14)

By Matt Tracy

WASHINGTON, Sept 25 (Reuters) - U.S. Treasury yields held morning gains on Thursday following stronger-than-expected second-quarter economic data that could strengthen the case for a rates pause from the Federal Reserve at its October meeting.

The benchmark U.S. 10-year Treasury note yield was last up 3.6 basis points at 4.183%. It hit its highest level since September 5 on Monday.

The 30-year bond yield was last up 1.8 bps at 4.773%.

The uptick in yields follows a series of economic data reports on Thursday morning that surprised to the upside. These included initial jobless claims last week that were lower than analysts' forecasts.

Further data showed existing home sales declined in August amid affordability issues and high mortgage rates.

GDP data showed the economy grew in the second quarter, driven by an ebb in imports and strong consumer spending.

"It seems like we're reacting more to the GDP upside surprise," said Molly Brooks, U.S. rates strategist at TD Securities, about the uptick in two- and 10-year Treasury yields.

"(But) I think markets are still biased towards seeing a slowdown in data going forward," she cautioned.

Markets are now pricing in an 85.5% chance of a 25 bps interest rate cut from the Fed in October, and a 14.5% chance of a pause. U.S. rate futures have also priced in 44 bps worth of cuts through the end of the year, according to LSEG data.

The two-year yield, which typically reflects interest rate expectations, was last up 6.1 bps from Wednesday's close at 3.659%.

Market participants are looking to further data, especially for the third quarter, showing the direction of inflation and the job market for clues to the Fed's rates decision at its October meeting.

The next big indicators will be the initial jobless claims numbers released on October 2, and then U.S. employment and unemployment reports on October 3.

"The workforce has not been growing at the pace it was over the last couple of years," said Subadra Rajappa, head of U.S. rates strategy at Soci?t? G?n?rale.

"The question then becomes: is that really a weak labor market?" she added.

The Treasury Department will auction $44 billion in seven-year notes on Thursday afternoon. The auction follows two- and five-year auctions earlier in the week that were met with around average demand from primary dealers. (Reporting by Matt Tracy in Washington, D.C.; Editing by Marguerita Choy and Chris Reese)