TREASURIES-US yields sink as mild inflation firms rate cut bets

(Adds analyst comment, byline, details of the data, yield curve, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 13 (Reuters) - U.S. Treasury yields dropped on Friday as cooler-than-expected inflation for January bolstered bets that ?the Federal Reserve will deliver at least two ?rate cuts this year.

Data showed the Consumer Price Index rose 0.2% last month after ?an unrevised 0.3% gain in December. Economists polled by Reuters had ?forecast the CPI increasing 0.3%.

Excluding the volatile food ?and energy components, ?the CPI increased 0.3% after rising by an unrevised 0.2% in December.

"The Fed's path ?to 'normalization' cuts appears clearer now, with ?fears of a strong January print behind us with CPI coming in cold," said Lindsay Rosner, head of ?multi-sector fixed income investing, at Goldman ?Sachs Asset ?Management, in New York.

"How short or long that path is, however, will depend on whether employment continues to show signs of ?improvement, given the FOMC's (Federal Open Market Committee) sensitivity to labor market weakness. ?We continue to expect two cuts this year, with the next move coming in June."

In morning trading, U.S. 10-year yields fell 3.7 basis points (bps) to 4.067%, while the two-year yield, which reflects interest ?rate ?expectations, was down 4.4 bps at 3.422%.

The yield curve ?initially steepened following the CPI data. The spread between two-year and 10-year ?yields widened to as much as 66.5 bps compared with 64 bps late on Thursday. It was last at 64.2 bps.

The curve showed a bull-steepening move, with short-term rates falling faster than long-term yields - a pattern that typically signals expectations of near-term Fed rate cuts.

Following the inflation data, U.S. ?rate futures priced in about 63 bps of easing this year or roughly two rate cuts of 25 bps each. That was 58 ?bps before the CPI release. (Reporting ?by Gertrude Chavez-Dreyfuss; Additional reporting by Saeed Azhar; ?Editing by Nia Williams)