TREASURIES-US yields decline for second day after Fed statement, data

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Jobless claims rise, volatility attributed to seasonal factors

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10-yr yield on track for biggest two-day drop in two months

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Markets pricing in 24.4% chance of January Fed cut

(Updates to afternoon US trading)

By Chuck Mikolajczak

NEW YORK, Dec 11 (Reuters) - U.S. Treasury yields dipped for a second straight session on Thursday as investors digested a Federal Reserve rate decision and policymaker outlooks that were more dovish than anticipated and a reading on the labor market. The Fed cut rates by 25 basis points on Wednesday, as widely anticipated. While the Fed's statement indicated rates were unlikely to move lower in the near term as it looked for further economic clarity, investors viewed the split in views among policymakers and Fed Chair Jerome Powell's comments after the announcement as giving the meeting a dovish tilt. In addition, the central bank said it would begin buying short-dated government bonds on Friday to help manage market liquidity levels to ensure the central bank retains firm control over its interest rate target system, which is earlier and in amounts larger than some market participants were expecting.

"The T-Bill operations that they announced had really become increasingly anticipated by analysts who focus on the front end of the curve, funding markets, et cetera and so it was less of a surprise to Wall Street, but perhaps had been a little bit under the radar for the typical investors," said Bill Merz, head of capital market research at U.S. Bank Wealth Management in Minneapolis.

"It might have come as a surprise to some, but it didn't come as a surprise to us because it was a necessary shift to ensure that they can maintain effective rates near where their targeted rates are, and so from that perspective, it was a constructive development that helps ensure effective overnight funding rates are where they're intended to be."

The yield on the benchmark U.S. 10-year Treasury note fell 2.3 basis points to 4.141%. The yield snapped a four-session streak of gains on Wednesday, which was its longest run of gains in five weeks. The restart of bond buying that will once again expand the Fed's balance sheet comes after its decision in late October to stop shrinking its holdings as of December 1.

Since 2022, the central bank had been allowing Treasury and mortgage bonds it owns to mature and not be replaced, in an effort called quantitative tightening, or QT.

The yield on the 30-year bond shed 0.4 basis point to 4.792%. An auction of $22 billion in 30-year bonds was solid, according to analysts, with demand of 2.36 times the notes on sale in line with the long-term average.

Economic data showed weekly initial jobless claims jumped 44,000 to a seasonally adjusted 236,000, above the 220,000 estimate of economists polled by Reuters, although many analysts chalked up the recent volatility in the data to seasonal factors.

Yields around the globe had been climbing in recent weeks up until the Fed announcement, as many central banks have signaled they are either at or near the end of their own easing cycles, while the Bank of Japan is widely anticipated to hike rates at its policy meeting next week.

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 61.3 basis points after climbing to 61.7 on the day, its highest since September 3. Markets are now pricing in a 24.4% chance for a 25 basis point cut from the Fed at its January meeting, according to CME's FedWatch Tool. Most global brokerages predict the Fed will reduce interest rates in the short term, reiterating their earlier position even as the central bank indicated that near-term cuts were unlikely.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 3.9 basis points to 3.526%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.318% after closing at 2.329% on Wednesday.

The 10-year TIPS breakeven rate was last at 2.259%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci)