TREASURIES-US yields fall after inflation data matches expectations

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CPI rose 0.3% in December, matching expectations

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Fed rate cut expectations remain largely unchanged

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Musalem says no reason near-term for further rate cuts

(Updates to afternoon US trading)

By Chuck Mikolajczak

NEW YORK, Jan 13 (Reuters) - U.S. Treasury yields declined on Tuesday, after a reading on inflation for December came in as expected and kept intact market expectations for the path of rate cuts from the Federal Reserve this ?year. The Labor Department said the Consumer Price Index (CPI) rose 0.3% last month, matching expectations of economists polled by Reuters. In the 12 months through December, the ?CPI advanced 2.7%, equaling November's gain and in line with expectations.

The yield on the benchmark U.S. 10-year Treasury ?note slipped 2.4 basis points to 4.175%.

"It's more of a relief trade that indeed ?inflation does not appear to be ?accelerating and so that lingering concern about inflation being too high and what that means for a host of issues, that's a concern that persists ?in the minds of markets and investors," said Bill Merz, ?head of capital market research at U.S. Bank Wealth Management in Minneapolis.

"When we have numbers like today's that alleviate some degree of that tail risk of higher inflation, that's a constructive sign, and ?we're seeing the bond markets have a modest but ?constructive reaction to ?that as well."

The yield on the 30-year bond fell 1.7 basis points to 4.823%. Expectations for the path of Fed rate cuts were little changed after the data, with markets pricing in only a 2.8% ?chance of a cut at the central bank's meeting later this month, down from 4.4% in the prior session, according to CME's FedWatch Tool. Expectations for a cut of at least 25 basis points at the Fed's March meeting dipped to 27.4% from 28.7% on Monday.

Markets are currently pricing in roughly 50 basis points of cuts this year, according to LSEG data.

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 63.9 basis points. Federal Reserve Bank of St. Louis President Alberto Musalem said the Fed is committed to returning inflation to ?its 2% target and Tuesday's data was encouraging for views that it will converge more towards that level this year, but there was no near-term reason to cut rates further.

Federal Reserve Bank of Richmond President Tom Barkin is scheduled to speak later in the day. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, shed 2.5 basis points to 3.522%.

An auction of $22 billion in 30-year bonds was seen as strong by analysts, with above average demand of 2.42 times the bonds on ?sale. Auctions of $58 billion in three-year notes and $39 billion in 10-year notes on Monday were also seen as solid by market participants.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.368%, its highest since mid-November.

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

(Reporting by Chuck Mikolajczak; Editing by Susan Fenton and Nick Zieminski)