*

Yields inch higher after economic data surprises to upside

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Market awaits jobs numbers, other Q3 data, for Fed's rate

path

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Treasury to auction $44 billion in seven-year notes in

afternoon

(Updates throughout with latest market activity, adds comments

in paragraphs 13, 14)

By Matt Tracy

WASHINGTON, Sept 25 (Reuters) - U.S. Treasury yields

held morning gains on Thursday following stronger-than-expected

second-quarter economic data that could strengthen the case for

a rates pause from the Federal Reserve at its October meeting.

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

was last up 3.6 basis points at 4.183%. It hit its highest level

since September 5 on Monday.

The 30-year bond yield was last up 1.8 bps at

4.773%.

The uptick in yields follows a series of economic data

reports on Thursday morning that surprised to the upside. These

included initial jobless claims last week that were lower than

analysts' forecasts.

Further data showed existing home sales declined in August

amid affordability issues and high mortgage rates.

GDP data showed the economy grew in the second quarter,

driven by an ebb in imports and strong consumer spending.

"It seems like we're reacting more to the GDP upside

surprise," said Molly Brooks, U.S. rates strategist at TD

Securities, about the uptick in two- and 10-year Treasury

yields.

"(But) I think markets are still biased towards seeing a

slowdown in data going forward," she cautioned.

Markets are now pricing in an 85.5% chance of a 25 bps

interest rate cut from the Fed in October, and a 14.5% chance of

a pause. U.S. rate futures have also priced in 44 bps worth of

cuts through the end of the year, according to LSEG data.

The two-year yield, which typically reflects

interest rate expectations, was last up 6.1 bps from Wednesday's

close at 3.659%.

Market participants are looking to further data, especially

for the third quarter, showing the direction of inflation and

the job market for clues to the Fed's rates decision at its

October meeting.

The next big indicators will be the initial jobless claims

numbers released on October 2, and then U.S. employment and

unemployment reports on October 3.

"The workforce has not been growing at the pace it was

over the last couple of years," said Subadra Rajappa, head of

U.S. rates strategy at Société Générale.

"The question then becomes: is that really a weak labor

market?" she added.

The Treasury Department will auction $44 billion in

seven-year notes on Thursday afternoon. The auction

follows two- and five-year auctions earlier in the week that

were met with around average demand from primary dealers.