(Updates as of 1456 ET)

By Alden Bentley

NEW YORK, Aug 16 (Reuters) - U.S. Treasury yields eased

on Friday, partly reversing the previous day's big gains as

investors digested data showing a resilient U.S. consumer and

inflation trending lower, leaving the Federal Reserve ample

scope for a small interest rate cut next month.

Treasuries ended lightly mixed after such an up-and-down

week, and volatility subsided almost as dramatically as it

spiked two weeks ago. The rise in volatility came after an

unemployment rate reading sparked near-panic that the economy

was heading for a recession rather than a soft landing.

That briefly sent yields tumbling to levels not seen in more

than a year as investors moved into the safety of Treasuries and

jettisoned stocks.

But this week healthy retail sales data and a smaller than

expected rise in weekly unemployment claims on the heels of

benign inflation readings earlier in the week restored

confidence in the economic picture. That launched two-year and

10-year yields into their biggest rises in weeks as investors

reversed course. Yields on bonds fall when their prices rise.

"Yields are a little bit lower, so Treasuries are still

looking pretty good. Bouncing back," said Kim Rupert, managing

director of fixed income at Action Economics in San Francisco.

"It's been super-volatile, so we are seeing some calming in

the market. I think with a rate cut pretty much settled now for

September, the markets are cheering that."

Rupert also said there was an uptick of safe-haven demand

for Treasuries on Friday, mainly due to geopolitical risk

factors such as the Middle East situation and the Russia-Ukraine

war.

Interest rate futures traders scaled back bets that the Fed

would need to cut 50 basis points when it next meets in

September.

Based on the fed funds futures term structure, they

now see a 74% chance of a 25 bps ease in the policy rate, which

has been in a 5.25%-5.5% target range since the Fed stopped

hiking rates in July 2023.

Since there is no Federal Open Market Committee meeting in

August, the market seeks a strong signal from Fed Chair Jerome

Powell next Friday when he speaks at the U.S. Central Bank's

annual symposium in Jackson Hole, Wyoming.

"Today is just a little bit of a pullback of yesterday's

oversized move. We kind of showed that you're seeing cracks in

unemployment, but the underlying trend hasn't really collapsed,"

said Jan Nevruzi, U.S. rates strategist at TD Securities in New

York.

"I think it will be harder for Powell to make the case that

we need an outsized cut at next week's Jackson Hole speech," he

said.

Weak July housing starts and building permits data kept

pressure on yields before they ticked a bit higher following the

release of a stronger-than-expected preliminary August

University of Michigan consumer sentiment survey reading of

67.8, up from July's 66.4.

Federal Reserve Bank of Chicago President Austan Goolsbee on

Friday told National Public Radio that the U.S. economy is not

showing signs of overheating, so central bank officials should

be wary of keeping restrictive policy in place longer than

necessary.

"You don't want to tighten any longer than you have to,"

Goolsbee said. "And the reason you'd want to tighten is if

you're afraid the economy is overheating, and this is not what

an overheating economy looks like to me."

The yield on the benchmark U.S. 10-year note

fell 3.6 bps from late Thursday to 3.89%, paring Thursday's gain

that was the biggest in a week. For the week it lost 5.2 bps.

The two-year note yield, which typically moves in

step with interest rate expectations and reached its highest

since Aug. 2 on Thursday, was last down 3.7 bps at 4.0644%. Its

15.9 bps rise the previous session was the biggest since April

10. For the week it was less than 1 bp higher.

The 30-year bond yield fell 3.3 basis points to

to 4.1466%.

The ICE BofA Merrill Lynch MOVE index of fixed income market

volatility closed unchanged from Thursday at 103.74, but

well below last week's peak at 121.22, which was the highest

since Jan 4.

The closely watched gap between yields on two- and 10-year

Treasury notes, considered a gauge of growth

expectations, was at negative 17.6 bps, barely changed from late

Thursday.

An inverted yield curve is generally seen as pointing to a

recession. During the market freak-out early last week, hopes of

an aggressive September easing shifted the gap between 2- and

10-year yields to a positive 1.5 bps, the first time the curve

had a more normal upward slope since July 2022.

The implied breakeven inflation rate on 10-year Treasury

Inflation Protected Securities (TIPS) fell to

2.0820% from 2.1150 late Thursday.

The five-year TIPS breakeven inflation rate

fell back below 2% to 1.9703%. This suggests that investors

think annual inflation will average below the Fed's 2% target

rate for the next five years.