TREASURIES-US yields drop after initial jobless claims data, 30-year auction

*

Initial jobless claims decrease less than expected

*

CPI data due on Friday

*

$25 billion 30-year auction sees very strong demand

(Updates to afternoon US trading)

By Chuck Mikolajczak

NEW YORK, Feb 12 (Reuters) - U.S. Treasury yields were lower on Thursday, in the wake of data on the labor market that showed new applications for unemployment benefits decreased last week, ?extending declines after a robust auction of 30-year bonds. Yields briefly pared declines ?after the Labor Department said initial claims for state unemployment benefits dropped 5,000 to a seasonally adjusted 227,000, above the 222,000 estimate of economists polled by Reuters ?but still indicating stabilization in the labor market, before quickly reversing course.

Bond yields had jumped on Wednesday after ?a stronger-than-expected jobs report dented market expectations that the Federal Reserve might have the leeway ?to cut interest rates in the ?near term, with the 2-year note registering its biggest daily jump since late October.

"There was a bit of a freak-out in the bond market," ?said Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors in New ?York.

"The bull case on the Fed cutting was pretty much centered around the weak employment picture, so that case was challenged. That was an overreaction, the economy is growing, but it's not by ?any means a more normal 3% growth, and ?so now we're ?sort of just back to where we were."

The yield on the benchmark U.S. 10-year Treasury note tumbled 8.1 basis points, its biggest drop since October 10, to 4.102% and is on track for its fifth ?drop in the past six sessions.

The market focus will shift to inflation data in the form of the consumer ?price index (CPI), set to be released on Friday, to gauge the path of interest rates from the Federal Reserve.

Yields dropped further after a very strong auction of $25 billion in 30-year bonds, with demand at 2.66 times the bonds on sale above the 2.36 average, according to BMO Capital Markets.

The yield on the 30-year bond tumbled 8.2 basis points to ?4.732% after ?dropping to 4.728%, its lowest since December 3.

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 63.6 basis points after falling to 63.2, its lowest since January 27.

Expectations the central bank could have the leeway to cut interest rates had been creeping higher before reversing after Wednesday's unexpectedly strong jobs report, and the market is not pricing in more than a 50% chance for a cut of at least 25 basis points until the Fed's June meeting, according to CME's FedWatch Tool.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 4.8 basis points ?to 3.464%.

Fed officials scheduled to speak on Thursday include Bank of Dallas President Lorie Logan and Governor Stephen Miran.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.466% after closing at 2.502% on February 11.

The 10-year TIPS ?breakeven rate was last at 2.302%, indicating the market ?sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak, ?Editing by Franklin Paul and Nick Zieminski)