(Adds details, prices, investor, context throughout)

By Davide Barbuscia

NEW YORK, April 11 (Reuters) - U.S. Treasury yields were

mixed on Thursday morning after the release of

softer-than-expected March producer prices data, with two-year

yields hitting 5% for the first time since November.

The producer price index rose 0.2% month-on-month in March,

below an expected 0.3% increase. Meanwhile, the number of

Americans filing new claims for unemployment benefits fell more

than expected last week, suggesting the labor market remained

fairly tight.

Yields, which move inversely to prices, remained high on the

back of hotter-than-anticipated inflation data on Wednesday that

has raised doubt over the Federal Reserve's ability to lower

interest rates later this year.

Benchmark 10-year yields were last seen at

4.568%, roughly in line with Wednesday's levels. Two-year yields

, which tend to more directly reflect expectations on

monetary policy, were last at 4.948%, about 2 basis points

lower.

While producer prices for March were welcome news on

Thursday, investors were still scarred by Wednesday's release of

the consumer price index, which showed inflation remains sticky.

"The big event really was yesterday's CPI," said Michael

Reynolds, vice president of investment strategy at Glenmede.

"September is probably our best guess for a first rate cut,

but that means you have to see inflation get back down ... and

we just haven't seen that yet this year," he said.

On the back of Wednesday's inflation data, traders have

trimmed their expectations for rate cuts this year to less than

two, below the three cuts Fed officials had penciled in last

month. On Thursday, fed funds futures were showing expectations

of a total of about 44 basis points of cuts this year.

"PPI ran cool in March, but not by enough to negate the

signal from the first quarter's hot CPI reports," Bill Adams,

chief economist for Comerica Bank, said in a note. "The Fed will

likely wait until the third quarter to begin reducing interest

rates," he said.

Minutes of the Fed's March rate-setting meeting, released on

Wednesday, showed Fed officials had begun worrying last month

that progress on cooling inflation might have stalled and that a

longer period of tight monetary policy could be needed.

On Thursday, Federal Reserve Bank of New York President John

Williams said the uncertain outlook means the Fed must watch

incoming data to set rate policy.

Later on Thursday, the Treasury will sell $22 billion in

30-year notes. A $39 billion 10-year note auction on Wednesday

showed investors demanded a premium to absorb the issuance,

despite yields having soared because of rising price pressures.