TREASURIES-US yields dip after data with Middle East in focus

(Updates to afternoon trade )

* US economic data shows weaker GDP growth, higher jobless claims, and steady inflation gauges

* Hormuz ship traffic still below normal volumes

* Israel seeking direct negotiations with Beirut

By Chuck Mikolajczak

NEW YORK, April 9 (Reuters) - U.S. Treasury yields were slightly lower on Thursday after a flurry of economic data in choppy trading, moving off earlier highs as investors gauged whether a long-standing truce in the Middle East could be achieved. U.S. crude rose 2.6% to $96.86 a barrel and Brent climbed to $95.43 per barrel, up 0.72% but were off earlier highs after Israeli Prime Minister Benjamin Netanyahu said he is seeking direct talks with Beirut.

Treasury yields moved lower in tandem with the pullback in crude prices. Still, traffic through the Strait of Hormuz stood at well below 10% of normal volumes despite a U.S.-Iran ceasefire as Tehran asserted its control by warning ships to keep to its territorial waters.

High oil prices pose a risk to the inflation picture, as well as the overall economy, giving the Federal Reserve little room to cut interest rates.

"The Treasury market has fully handed the reins over to the commodity sector, the energy space. This isn't about growth or labor or whatever economic backdrop we see in the U.S.," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin.

"We're going to have oil up in the nineties or hundreds, that's going to keep inflation pressure going, and that's not going to be good. That's going to make it very difficult for the new Fed chair to come in and make an argument to try and say, 'hey, we need to deliver two rate cuts'."

TREASURY YIELDS EDGE HIGHER

The yield on the benchmark U.S. 10-year Treasury note shed 0.6 basis points to 4.285% after hitting a high of 4.321%. Yields initially rose after a batch of economic data. The Commerce Department said gross domestic product increased in the fourth quarter at a downwardly revised 0.5% annualized rate, from the previously reported 0.7% pace and below the 0.7% estimate of economists polled by Reuters.

The yield on the 30-year bond edged up 0.7 basis points to 4.893%. Other data showed the personal consumption expenditures price index climbed 0.4%, matching expectations, after an unrevised 0.3% gain in January while weekly initial jobless claims rose 16,000 to a seasonally adjusted 219,000, above the 210,000 estimate. The PCE index was up 2.8% year on year.

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 50.8 basis points.

A $22 billion auction of 30-year bonds capped off the new supply for the week with somewhat soft results, according to analysts, with demand for the debt, at 2.39 times the bonds on sale, just slightly below average.

RATE CUT PROSPECTS DIMMING

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 1.9 basis points to 3.775%.

Several Fed officials said earlier this week that the sharp rise in oil prices due to the war posed a risk to inflation, even as it slows the economy and the labor market. Minutes from the Fed's March 17-18 meeting on Wednesday showed a growing group of policymakers felt that interest rate hikes might be needed to counter inflation that continued to exceed the central bank's 2% target. Markets are pricing in a 30.8% chance for a rate cut of at least 25 basis points at the Fed's December meeting, according to CME's FedWatch Tool, up from the 21.5% in the prior session but down sharply from the 82.5% from a month ago.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.596% after closing at 2.598% on Wednesday.

The 10-year TIPS breakeven rate was last at 2.347%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

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(Reporting by Chuck Mikolajczak; Editing by Kirsten Donovan and Andrea Ricci )