TREASURIES-US yields slip after data as trade talks eyed

By Chuck Mikolajczak

NEW YORK, June 5 (Reuters) - U.S. Treasury yields were slightly lower on Thursday in a choppy session, as a drop after a round of economic data was offset by a report that U.S. President Donald Trump had phone talks with Chinese President Xi Jinping.

Yields extended declines after the Labor Department said weekly initial jobless claims rose by 8,000, climbing for a second straight week, to a seasonally adjusted 247,000 versus the 235,000 estimate of economists polled by Reuters.

A separate report from the Labor Department showed worker productivity dropped at a faster pace than initially thought in the first quarter, which sent labor costs sharply higher at a time when businesses are grappling with higher costs due to U.S. Trump's tariff policies on imported goods.

But yields reversed course and pared declines after China's state-run news agency Xinhua reported Xi on Thursday held talks with Trump by phone.

"The fact that Trump and Xi had a phone call that's probably constructive and the market's reacting to that," said Bill Merz, head of capital markets research at U.S. Bank Asset Management in Minneapolis.

"But to pretend that anyone has an edge in tariff negotiation speculation or anticipating how it unfolds when really there's probably three or four people on the planet that have true insight on that, the rest is speculation and conjecture."

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB fell 1.6 basis points to 4.349% after dropping to 4.318%, its lowest since May 8. The 10-year yield was on track for its fifth drop in six sessions.

Markets have been volatile since Trump announced a slew of tariffs on countries around the globe on April 2, only to pause some, increase others and declare new ones, with the 10-year yield touching a 3-month high of 4.629% on May 22.

The yield on the 30-year bond US30YT=TWEB fell 3.1 basis points to 4.857%.

Several Federal Reserve officials are expected to speak on Thursday, including Governor Adriana Kugler, Bank of Kansas City President Jeffrey Schmid, and Bank of Philadelphia President Patrick Harker.

Federal Reserve officials have recently indicated a patient approach to determining the effect the levies may be having on prices, although they have also indicated rate cuts may still be possible this year.

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 economic expectations, was at a positive 48.1 basis points.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 1.1 basis points to 3.866% after dipping to 3.833%, its lowest since May 8.

Adam Turnquist, chief technical strategist at LPL Financial in Charlotte, North Carolina, said in a note that the 2-year yield has been re-testing its support near the 50-day moving average, currently at 3.8714%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.333% after closing at 2.335% on Wednesday, its lowest close since May 7.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.299%, indicating the market sees inflation averaging about 2.3% a year for the next decade.