TREASURIES -US yields fall after inflation data; focus on 30-year bond sale, Fed

* U.S. yield curve widens inversion post CPI data * Fed funds futures price in first rate cut in May 2024 * Fed not likely to signal pivot from current tightening * Focus on 30-year bond auction (Adds new comment, adds 30-year auction outlook, Fed preview, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Dec 12 (Reuters) - U.S. Treasury yields edged lower on Tuesday after data showed underlying inflation in the world's largest economy came in line with forecasts, reinforcing views the Federal Reserve will hold rates steady after its two-day policy meeting on Wednesday. The decline in yields, however, was much steeper immediately after the release of the data. For instance, the benchmark U.S. 10-year yield dropped as low as 4.15% following the report. It was last at 4.215%, down 2.3 basis points (bps). Tuesday's report showed the core consumer price index (CPI), excluding the volatile food and energy components, increased 0.3% in November after climbing 0.2% in the prior month, meeting economists' expectations. The core was lifted by a rebound in prices of used cars and trucks. On an annual basis, core CPI rose 3.1% in November, also in line with the market consensus. The headline CPI though edged up 0.1% on a month-on-month basis in November, after being unchanged in October. "The in-line CPI report is unlikely to change the direction of markets or the Fed," said Matt Peron, director of research and global head of solutions, at Janus Henderson Investors. "Though service prices remain stubborn, the overall picture is one of slowly normalizing inflation. However, it is unlikely to allow the Fed to relax its fight and, as such, could keep an aggressive tone." The Fed began its two-day meeting on Tuesday and market participants widely expect the U.S. central bank to keep interest rates steady. It is unlikely, however, to signal a shift from its tightening policy stance. Post CPI-data, the fed funds futures market has priced in the first likely rate cut in May at roughly 77%, according to the CME's FedWatch tool, after several weeks of expectations for easing in March. "I think (Fed Chair Jerome) Powell pushes back (against rate cut bets) in his press conference and ultimately the bond market is going to be in the hands of economic data going forward," said Andrew Szczurowski, head of agency mortgage-backed securities and portfolio manager at Morgan Stanley Investment Management. "You can really get the Fed to start to soften a little bit in the coming months when we start seeing negative labor prints. But we're still a long way from that." In midday trading, the two-year yield, which typically reflects interest rate expectations, was down 1.5 bps at 4.711% . Following the CPI report, a closely-monitored part of the U.S. Treasury yield curve, showing the gap in yields between two- and 10-year notes, widened its inversion to as much as minus 61.80 bps, the most inverted since late September. The curve was last at minus 49.60 bps. This spread has historically predicted upcoming recessions, forecasting eight of the last nine. The curve saw weeks of steepening in November and parts of December, where the longer-term yields are higher than short-term ones, as markets priced in expectations U.S. rates have peaked and the next Fed action is a rate cut. Investors are also focused on Tuesday's auction of $21 billion of U.S. 30-year bonds, especially after the much weaker-than-expected sale of the same maturity last month. The November auction's high yield was more than five basis points higher than the forecast rate at the bid deadline. That rate miss or so-called "tail" was the largest since August 2011. U.S. rates analysts from BMO Capital Markets expect another tail on this auction. "The CPI may have cleared the way for marginally higher bidding conviction, but they're looking for another tail for the long bond as there remains no shortage of volatility for investors to contend with involving tomorrow's FOMC (Federal Open Market Committee) developments," BMO analysts wrote in a research note. December 12 Tuesday 11:41AM New York / 1641 GMT Price Current Net Yield % Change (bps) Three-month bills 5.2525 5.4127 0.016 Six-month bills 5.18 5.4088 0.008 Two-year note 100-79/256 4.7077 -0.019 Three-year note 99-226/256 4.4171 -0.025 Five-year note 100-172/256 4.2232 -0.028 Seven-year note 100-192/256 4.2492 -0.029 10-year note 102-80/256 4.2121 -0.027 20-year bond 103-104/256 4.4893 -0.019 30-year bond 107-52/256 4.3187 -0.011 (Reporting by Gertrude Chavez-Dreyfuss; editing by Christina Fincher, Nick Zieminski and Sharon Singleton)