TREASURIES-Longer-dated yields fall as producer price increases ease

(Adds comments from Fed's Kashkari in 6th paragraph, 30-year auction results in 11th paragraph, Yellen comments on debt ceiling in 14th paragraph; updates prices) By Karen Brettell NEW YORK, May 11 (Reuters) - Longer-dated U.S. Treasury yields fell on Thursday on news of smaller producer price increases, bolstering expectations that an easing of inflationary pressures will lead the Federal Reserve to pause its interest rate increases. Producer prices rose at an annual rate of 2.3% in April, the smallest year-on-year rise since January 2021, after a 2.7% advance in March. Data on Wednesday showed consumer price gains slowing to below 5% in April for the first time in two years. "The inflation picture is getting much better," said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York. "The Fed is probably done tightening." Benchmark 10-year notes were last at 3.397%, down 4 basis points on the day, while two-year yields edged higher to 3.906%, erasing an earlier drop. The yield curve inversion between two-year and 10-year yields deepened to minus 52 basis points. Yields came off their lows after Minneapolis Fed President Neel Kashkari warned that rates may need to stay elevated for "an extended period of time" if inflation remains stubbornly high. Investors worry that the economy will slow and tip into recession in the second half of the year due to higher interest rates and credit tightening, which has worsened as a result of stress on the U.S. regional bank sector. The Fed is viewed as almost certain to keep rates unchanged at its next meeting in June. Fed funds futures traders are also pricing in around 76 basis points of rate cuts for the second half of the year, with a rate cut fully priced in for September. Other data on Thursday showed the number of Americans filing new claims for jobless benefits jumped last week to the highest level since late 2021, suggesting that higher interest rates were starting to weigh on the labor market. The Treasury saw strong demand for a $21 billion sale 30-year bonds on Thursday, the final sale of $96 billion in coupon-bearing supply this week. The bonds sold at a high yield of 3.741%, more than a basis point below where they had traded before the auction. The bid-to-cover ratio was 2.43 times, the highest since January. Demand was robust for a $40 billion sale of three-year notes on Tuesday and there was solid interest in a $35 billion auction of 10-year notes on Wednesday. Investors are also focused on talks to raise the $31.4 trillion U.S. debt ceiling, as Treasury Secretary Janet Yellen urged Congress to do so, warning that an unprecedented default that would trigger a global economic downturn and risk undermining U.S. global economic leadership. Yields on one-month bills that come due around the time when the Treasury is at risk of running out of cash held near record highs on Thursday and last traded at 5.524%. Two-month bill yields plummeted as low as 4.526%, from 4.973% on Wednesday, as investors sought out bills. May 11 Thursday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 5.035 5.17 -0.062 Six-month bills 4.9075 5.1155 0.008 Two-year note 99-241/256 3.9056 0.005 Three-year note 100-42/256 3.5668 0.006 Five-year note 100-166/256 3.357 -0.016 Seven-year note 100-204/256 3.3706 -0.027 10-year note 99-208/256 3.3973 -0.039 20-year bond 100-192/256 3.8203 -0.055 30-year bond 97-204/256 3.7482 -0.051 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 20.50 -1.00 spread U.S. 3-year dollar swap 15.75 -1.75 spread U.S. 5-year dollar swap 8.75 -0.50 spread U.S. 10-year dollar swap 0.50 -0.50 spread U.S. 30-year dollar swap -43.50 -0.25 spread (Reporting by Karen Brettell; Editing by Sharon Singleton and Richard Chang)