TREASURIES-US yields dip after inflation, jobless data; market awaits payrolls

(Adds analyst comment, updates prices) * U.S. PCE rises 0.2% in July, matches June rise * U.S. weekly jobless claims fall in latest week * U.S. yield curve initially extends inversion * Month-end buying helps boost Treasury prices By Gertrude Chavez-Dreyfuss NEW YORK, Aug 31 (Reuters) - U.S. Treasury yields slid in choppy trading on Thursday after data showing inflation came in line with the consensus forecast, while jobless claims fell, reinforcing expectations the Federal Reserve will hold interest rates steady at the September policy meeting. Investors also pared back bets of a rate increase in November and December. U.S. yields traded within narrow ranges as investors braced for Friday's nonfarm payrolls report. Wall Street economists polled by Reuters expect a jobs print of 170,000 for August. "The market has been correcting from the pretty big losses (that led to higher yields) we have seen earlier in August," said Kim Rupert, managing director, global fixed income analysis, at Action Economics in San Francisco. "The market is also expecting that the Fed is probably done, although there is some negligible risk that there is one more hike in the cards. We maybe see a less than 50-50 chance for a hike in November." Thursday's data showed that inflation, as measured by the personal consumption expenditures (PCE) price index, rose 0.2% last month, matching June's gain. In the 12 months through July, the PCE price index gained 3.3% after climbing 3.0% in June. The Fed tracks the PCE price index for its 2% inflation target. Excluding the volatile food and energy components, the PCE price index gained 0.2%, after climbing by the same percentage in the prior month. The so-called core PCE price index increased 4.2% year-on-year in July after rising 4.1% in June. "Overall, the PCE shows inflation is slowing with other inflation indicators like CPI (consumer price index) and PPI (producer price index)," said Thierry Albert Wizman, global FX and rates strategist at Macquarie in New York. In the labor market, data showed U.S initial claims for state unemployment benefits fell 4,000 to a seasonally adjusted 228,000 for the week ended Aug. 26. Economists had forecast 235,000 claims for the latest week. In afternoon trading, U.S. two-year yields were last down 3.4 basis points (bps) at 4.852%. For the month of August, yields fell 2.1 bps. The benchmark 10-year yield also fell, down 2.9 bps at 4.088%. But for this month, 10-year yields rose 13.3 bps. Action Economics' Rupert said month-end activity also boosted Treasury debt prices, pushing their yields lower. "The duration index extends a little above the average and that brought in buyers both in Europe and here," Rupert said. Asset managers typically need to buy Treasuries to hit the longer duration index. The yield curve, as measured by the gap between yields on two- and 10-year Treasury notes, initially extended its inversion after the economic reports to -80.40 bps, from -77.20 late Wednesday. The curve, which has forecast eight of the last nine recessions, was last -76.40 bps. Following the data, fed funds futures have priced in chances of 45.3% and 39.8% of a rate hike in November and December, respectively, according to the CME's FedWatch. Last Friday, when Fed Chair Jerome Powell said interest rates need to go higher to get to the central bank's 2% inflation target, both those odds were at more than 50%. August 31 Thursday 3:17PM New York/1917 GMT Price Current Net Yield % Change (bps) Three-month bills 5.3175 5.464 -0.018 Six-month bills 5.2775 5.5117 -0.027 Two-year note 100-70/256 4.8546 -0.029 Three-year note 99-136/256 4.5456 -0.025 Five-year note 100-154/256 4.2401 -0.033 Seven-year note 99-152/256 4.1926 -0.028 10-year note 98-64/256 4.0906 -0.027 20-year bond 99-208/256 4.3891 -0.030 30-year bond 98-176/256 4.2023 -0.026 (Reporting by Gertrude Chavez-Dreyfuss in New York Editing by Matthew Lewis)