TREASURIES -US yields slip after weak producer prices, mixed retail sales

By Tatiana Bautzer

NEW YORK, May 15 (Reuters) - U.S. Treasury yields fell on Thursday after data showed some deceleration in the world's largest economy in April, including drops in producer prices and manufacturing output and a slowdown in retail sales.

The reports suggested the Federal Reserve was on track to cut interest rates at least twice this year.

In mid-morning trading, the yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB was down 4.1 basis points (bps) after hitting a six-week high of 4.55% overnight.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 6.7 bps to 3.986%.

Yields retreated after the release of data that showed U.S. producer prices unexpectedly fell in April, with the index for final demand dropping 0.5% after an upwardly revised unchanged reading in March.

Economists polled by Reuters had forecast the PPI would rise 0.2%.

"Clearly, companies absorbed a big chunk of tariff increases," Chris Low, chief economist at FHN Financial, said in emailed comments. "Whether they will continue to do so, or will try to pass them on as price increases, remains to be seen."

At the same time, U.S. factory output slid more than expected, down 0.4% last month after an upwardly revised 0.4% gain in March. Economists polled by Reuters had forecast production would slip 0.2% after a previously reported 0.3% rise.

U.S. retail sales, on the other hand, were mixed, with the headline figure edging up 0.1% after an upwardly revised 1.7% jump in March.

But core retail sales, which exclude automobiles, gasoline, building materials and food services, fell 0.2% in April after an upwardly revised 0.5% gain in March. This measure corresponds most closely with the consumer spending component of gross domestic product.

"The fall in core retail sales was surprising and is helping push yields down," said Vail Hartman, a rates strategist at BMO Capital Markets in New York. "That's a discouraging start to the second quarter."

The overall data on Thursday reinforced bets on two interest rate cuts by the Fed, with a roughly 75% chance that the easing would begin in September, according to CME Group's FedWatch tool.

A closely-watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of the economic outlook, steepened to 49.9 bps, reflecting investor expectations of more Fed rate cuts.