TREASURIES-US yields dip with lower-than-expected inflation

NEW YORK, Dec 18 (Reuters) - U.S. Treasury yields fell on Thursday after data showed that consumer prices rose by less than economists had forecast on an annual basis last month, even as data lapses from a federal government shutdown raised questions about the accuracy of the release.

The headline Consumer Price Index was up 2.7% on the year in November, while core prices rose by 2.6%. Economists polled by Reuters had expected a headline increase of 3.1% and 3.0% core inflation.

"It's hard to argue that this is anything but supportive of the view that inflation is going away," said Jan Nevruzi, U.S. rates strategist at TD Securities in New York. "I completely agree that compared to a normal month this is certainly a less straightforward release to take at face value, but the data is the data.”

"Until something else comes in, like the December data later on to show the alternative, on net it is a pretty dovish release," Nevruzi said.

Concerns about data lapses have made traders wary of taking too strong of a view on future Fed policy based on this week's releases.

The government also skipped the October inflation release as it was unable to collect the data needed during the 43-day shutdown.

On Tuesday, the government's jobs report showed an unexpected increase in the unemployment rate last month.

The 2-year note US2YT=RR yield, which typically moves in step with Federal Reserve interest rate expectations, was last down 3.8 basis points on the day at 3.447% and reached 3.433%, the lowest since October 17.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 3.5 basis points to 4.116%, the lowest since December 11.

The yield curve between two- and 10-year yields US2US10=TWEB flattened by around one basis point to 66 basis points.

Bonds have been largely rangebound for the past few months as traders wait for fresh drivers of Fed policy. Trading volumes are likely to decline ahead of next week’s Christmas holiday.

A sharply divided Fed cut interest rates last week but signaled borrowing costs are unlikely to drop further in the near term as it awaits clarity on the direction of a job market showing signs of softening, inflation that "remains somewhat elevated" and an economy it sees picking up steam next year.

Fed funds futures traders are pricing in only a 26% chance of a rate cut at the Fed’s January 27-28 meeting and a more than 50% chance of a cut is now priced in for March 17-18.

Other data on Thursday showed that the number of Americans filing new applications for unemployment benefits fell last week, reversing the prior week's surge and suggesting labor market conditions remained stable in December.

Traders are also focused on who U.S. President Donald Trump will name as the next Fed chair to replace Jerome Powell when his term ends in May.

Trump said on Wednesday the next Fed chair will be someone who believes in lower interest rates "by a lot."

The U.S. Treasury Department will sell $24 billion in five-year Treasury Inflation-Protected Securities on Thursday.