(Updated at 2:18 p.m. ET/1418 GMT)

By Chuck Mikolajczak

NEW YORK, June 13 (Reuters) - U.S. Treasury yields were

lower on Thursday after economic data showed a cooling of the

labor market and price pressures, keeping hopes intact a rate

cut from the Federal Reserve may be on the horizon.

The Labor Department said the producer price index (PPI) for

final demand dropped 0.2% last month after advancing by an

unrevised 0.5% in April, and below the 0.1% increase forecast by

economists polled by Reuters. In the 12 months through May, the

PPI increased 2.2% after rising 2.3% in April.

The data comes after a gauge of consumer prices (CPI) on

Wednesday was unchanged in May for the first time in almost two

years.

"When you look at today's PPI and yesterday's CPI, it's

unambiguously good news on the inflation front. Of course, one

report doesn't make a trend, but these are the sort of numbers

and reports we need to see to be convinced that inflation is

coming down, and for the Fed to be convinced that inflation is

coming down," said Collin Martin, fixed income strategist at the

Schwab Center for Financial Research in New York.

A separate reading of the labor market showed weekly initial

jobless claims climbed 13,000 to a seasonally adjusted 242,000,

a 10-month high, and above the 225,000 estimate.

"When you see the rise in initial jobless claims, that just

suggests that the labor market is coming more into balance, and

it suggests that growth should moderate a bit down the road,"

Martin said.

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

fell 4.3 basis points to 4.252%.

Yields had dropped after the consumer price index report on

Wednesday but pared some declines after the Federal Reserve left

interest rates unchanged and pushed out the start of rate cuts

to perhaps as late as December.

The yield on the 30-year bond declined 3.6 basis

points to 4.414%. A $22 billion auction in 30-year bonds was

seen as strong by analysts, with the above-average demand of

2.49 times the notes on sale the highest in a year, according to

LSEG data.

Market expectations for a rate cut of at least 25 basis

points at the Fed's September meeting stand at 68.5%, according

to CME's FedWatch Tool, up slightly from the 64.7% in the prior

session.

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 negative 44.7 basis points.

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

moves in step with interest rate expectations, shed 5.3 basis

points to 4.697%.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.175% after closing at 2.19% on June 12.

The 10-year TIPS breakeven rate was last at

2.22%, indicating the market sees inflation averaging about 2.2%

a year for the next decade.