(Updated at 1500 EDT)

By Karen Brettell

July 26 (Reuters) - Benchmark 10-year U.S. Treasury

yields fell to a one-week low on Friday after data showed that

U.S. prices rose modestly in June, offsetting concerns about a

higher-than-expected uptick in inflation following

hotter-than-expected price increases for the second quarter on

Thursday.

The personal consumption expenditures (PCE) price index

nudged up 0.1% last month after being unchanged in May. The core

PCE price index rose 0.2% last month, following an unrevised

0.1% gain in May.

Economists polled by Reuters had forecast both monthly

headline PCE and core inflation rising 0.1% in June. Some

economists increased their estimate, however, after data on

Thursday showed core prices rising by 2.9% in the second

quarter, above economists' expectations for a 2.7% gain.

"The upside surprise angst that was instilled based on the

quarterly data yesterday was to some extent overpriced, so

that's why I think that we had the relief rally," said Vail

Hartman, interest rate strategist at BMO Capital Markets in New

York.

Thursday's data also showed the U.S. economy growing at a

2.8% annualized rate in the second quarter, double the first

quarter's 1.4% pace.

Interest rate sensitive two-year note yields were

last down 5.4 basis points at 4.389%. They reached 4.34% on

Thursday, the lowest since Feb. 2, before rebounding on the

growth and inflation data for the second quarter.

Benchmark 10-year note yields fell 5.6 basis

points to 4.2% and got as low as 4.19%, the lowest since July

19.

The closely watched yield curve between two-year and 10-year

notes was at minus 19 basis points, after

reaching minus 11 basis points on Thursday, the smallest

inversion since October.

An inversion in this part of the yield curve is seen as a

precursor to a recession, though the length of the current

inversion is longer than in previous episodes. It has been

negative since July 2022 and typically turns positive before an

economic downturn sets in.

Attention will now turn to the Federal Reserve's July 30-31

meeting. Traders see only a very slight chance of a rate cut

next week but will watch for clues that a September reduction is

coming, as is widely expected as inflation eases closer to the

Fed's 2% annual target.

Hartman noted that Friday's data brings the three-month

annualized rate for core PCE down to a year-to-date low of 2.3%,

"so the more recent trend is building upon the market's

confidence that we are on a trajectory that would get us to 2%

over the long run."

Traders are also pricing in a second and possible third Fed

rate cut by year end.

The government's employment report for July next Friday is

the next major economic focus that will help guide Fed

expectations.

The Treasury Department will also release its funding plans

for the coming two quarters and is expected to say that it will

keep most of its auction sizes unchanged for now.

(Reporting By Karen Brettell; Editing by Sharon Singleton and

Emelia Sithole-Matarise)