*

August Consumer Price Index rose 0.4% after July's 0.2%

rise

*

Rate future pricing reflects bets on three straight Fed

rate

cuts

By Alden Bentley

NEW YORK, Sept 11 (Reuters) - The yield on the benchmark

10-year Treasury note dipped below 4% to a five-month low on

Thursday after consumer prices data that leaned warm but was

still supportive for the bond market and unlikely to deter the

Federal Reserve from easing next week.

The Labor Department's August Consumer Price Index rose 0.4%

after July's 0.2% rise. That was just above the 0.3% increase

expected, while year-on-year CPI rose 2.9% as expected, a bit

hotter than July's 2.7% rise.

The market gained confidence from Wednesday's fall in

producer prices that inflation will not be enough of an issue to

keep the Fed on hold after next week's meeting.

On the other side of the Fed's dual mandate, a weakening

labor market is seen as smoothing the way for at least a 25

basis point cut. That was reinforced by initial jobless claims

that were also released on Thursday, showing 263,000 people

filed for unemployment insurance last week, much more than

expected and the revised 236,000 last week.

"The slightly elevated CPI and core CPI being in line with

expectations reinforces the notion that the Fed is going to cut

rates next week," said Oliver Pursche, senior vice president,

advisor, at Wealthspire Advisors in Westport, Connecticut.

"The higher unemployment filings suggest there's a

possibility it could be 50 basis points as opposed to 25 ...

although I think that's still only a remote possibility. But it

certainly seems like 'bad news is good news' is back," Pursche

said.

Rate futures pricing now reflects bets on three straight

quarter-point Fed rate cuts, one at each meeting left this year,

starting with this Tuesday and Wednesday's.

The yield on the benchmark U.S. 10-year Treasury note

fell to 3.996%, its lowest since April 7, and was

last off 1 basis point at 4.022%.

The two-year U.S. Treasury yield, which

typically moves in step with interest rate expectations for the

Fed, fell 2.9 basis points to 3.504%.

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, steepened to a positive 51.7 basis points.

The yield on the 30-year bond was unchanged at

4.677%, with the market now waiting to see how the Treasury's

auction of $22 billion goes later on Thursday, after strong

sales of three- and 10-year notes earlier this week.