(Updates as of 1040 ET)

By Alden Bentley

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

mainly steady on Friday after bobbling on news that producer

prices were flat in September, avoiding an inflation curve ball

for the Federal Reserve before it must decide how much more to

ease at its next meeting.

The unchanged reading in the producer price index for final

demand last month followed an unrevised 0.2% gain in August, the

Labor Department said on Friday. Economists polled by Reuters

had forecast the PPI edging up 0.1%. In the 12 months through

September, the PPI increased 1.8%, after climbing 1.9% in

August, more than the expected 1.6% rise.

The data followed news on Thursday that consumer prices rose

slightly more than expected in September, lifted by higher food

costs. The two reports supported views the Federal Reserve would

cut interest rates again after September's aggressive 50-basis

point reduction, but probably by less.

"It turned out to be just fractionally hotter than we

expected. It boosted the year-over-year rate a little bit," said

Kim Rupert, managing director, fixed income at Action Economics

in San Francisco.

"So, in combination with everything else we've seen

between the GDP upward revision to income, obviously the

employment report, I think the Fed still is going to cut rates

but just only needs to cut by 25 (bp) over the next two

meetings,"

The yield on benchmark U.S. 10-year notes was

off 0.2 basis points from late Thursday at 4.092%, just below

where it stood before the PPI was released.

The 30-year bond yield was up 1.1 basis points

to 4.3962% and the 2-year note yield, which typically

moves in step with interest rate expectations, was off 3.5 bp at

3.964%.

Later in the morning, the release of the University of

Michigan preliminary October consumer sentiment index showing a

fall to 68.9 from 70.1 in September, barely moved the needle for

the bond market.

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 positive 12.6 basis points, steeper than

late Thursday's +10.2 bp.

Based on the fed funds futures term structure,

traders see an 88% chance of a 25 bps ease in the policy rate at

the central bank's November meeting, while the odds for a

quarter-point cut were 85% late on Thursday. The rate has been

in a 4.75%-5.0% target range since the Fed cut last month.

The futures market also showed about 49 bps of easing this

year, down from more than 50 bps early this week. It priced in

almost 100 bps of Fed cuts in 2025, which was a sharp drop from

the roughly 200-250 bps of reductions estimated prior to last

Friday's blockbuster U.S. nonfarm payrolls report, which reset

Fed easing expectations.

The Treasuries market is closed on Monday for Columbus

Day.