(Updated at 1500 EDT)

By Karen Brettell

May 10 (Reuters) - U.S. Treasury yields rose on Friday

as traders waited on key inflation data for April next week to

guide expectations of Federal Reserve policy.

Yields hit one-month lows last week after a

softer-than-expected employment report for April re-ignited bets

that the U.S. central bank will make two 25 basis point interest

rate cuts this year.

Now, traders will need to see further progress on inflation

easing closer to the Fed's 2% annual target to solidify those

rate cut expectations.

Further declines in inflation "could certainly get the ball

rolling on rate cuts," said Tom di Galoma, managing director and

co-head of global rates trading at BTIG.

The Fed last week signaled it is still leaning towards

eventual reductions in borrowing costs, but noted that recent

disappointing inflation readings could make those rate cuts a

while in coming.

Debate over whether U.S. interest rates are high enough

deepened among Fed officials this week.

The closely watched core Consumer Price Index (CPI) on

Wednesday is expected to rise 0.3% in April, for an annual gain

of 3.6%, according to economists polled by Reuters.

Will Compernolle, a macro strategist at FHN Financial, sees

the outcome of the inflation report as asymmetric.

"If it is bad, it probably will determine the year because

the Fed has to seriously consider whether they are sufficiently

restrictive at this point," while inflation coming in as

expected would be positive for the Fed but "doesn't mean that

we're in the clear."

"If it's bad I think there are much bigger implications than

if it's a much more encouraging report," Compernolle said.

A survey on Friday showed that U.S. consumer sentiment

sagged to a six-month low in May amid growing anxiety about

inflation.

Benchmark 10-year note yields rose 6 basis

points to 4.504%.

Two-year yields gained 6 basis points to 4.868%.

The inversion in the yield curve between two-year and

10-year notes was little changed on the day at

minus 36 basis points.

Other U.S. data next week will include producer prices for

April on Tuesday and retail sales for April on Wednesday.