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U.S. producer prices rise in June

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U.S consumer sentiment eases in July

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U.S. 10-year yield on track for largest fall in a month

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U.S. yield continues to narrow inversion

(Recasts lead paragraph; adds new analyst, comment, graphics,

updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, July 12 (Reuters) -

U.S. Treasury yields were flat to modestly lower on Friday

as economic data on producer prices and consumer sentiment

bolstered expectations that the Federal Reserve was likely to

cut interest rates at its September meeting.

The benchmark 10-year yield edged lower to 4.186%

. On the week, it fell 8.6 basis points, on track for

its largest weekly fall in about a month.

The U.S. 30-year yield was slightly down at

4.398%, dropping 6.9 bps on the week on pace for its

biggest weekly fall since the week of June 10.

The two-year yield slid 4.7 bps to 4.459%, after

hitting a more than four-month low of 4.458%. On the week, it

was down 13.9 bps, the largest weekly decline in four weeks.

U.S. yields initially climbed after Friday's data showed the

producer price index (PPI) rose 0.2% last month after being

unchanged in May. Economists polled by Reuters had forecast the

PPI edging up 0.1%.

Details on the components in the producer prices report that

go into the calculation of the key inflation measures tracked by

the Fed showed cooling price pressures. That, along with the

weaker numbers on consumer prices, led economists to expect

personal consumption expenditures (PCE) inflation rose slightly

in June.

"The market kind of shrugged off the PPI data, simply

because of the mixed signals. It doesn't seem to be as bad when

you go into the details," said Jim Barnes, director of fixed

income, at Bryn Mawr Trust in Berwyn, Pennsylvania.

"What we have is that recent soft economic data combined

with more benign inflation numbers that continue to weigh in

Treasury yields. That purely reflects higher rate cut

expectations coming sooner than later."

The University of Michigan said on Friday its preliminary

reading on the overall index of consumer sentiment fell to 66.0

this month from a final reading of 68.2 in June. Economists

polled by Reuters had forecast a preliminary reading of 68.5.

The survey's reading of one-year inflation expectations

dipped to 2.9% from 3.0% in June. Its five-year inflation

outlook also fell to 2.9% from 3.0% in the prior month.

Fed Chair Jerome Powell in his previous press briefings said

the central bank tracks inflation expectations from the Michigan

report.

Following the PPI and consumer confidence data, the U.S.

rate futures market bet on a 94% chance of the Fed cutting rates

by 25 bps twice this year, most likely starting in September,

LSEG calculations showed, up from the 75% odds earlier this

week.

In other parts of the Treasuries market, the yield curve

further steepened or reduced its inversion, with the spread

between U.S. two-year and 10-year notes narrowing by as much as

minus 27.3 bps following Friday's reports. That

is the tightest spread since early May. The curve was last at

minus 27.7 bps.

The curve is a "bull steepener," a scenario in which

shorter-term yields are falling more steeply than longer-dated

ones. This reflects market expectations that the Fed is expected

to start its easing cycle soon.

The yield curve has been steepening since late June.

Investors reckoned that the short end has hit a top and is

holding steady because the Fed is unlikely to raise interest

rates again.