(Updates prices; adds investor comment, graphic, context)

By Davide Barbuscia

NEW YORK, April 11 (Reuters) - U.S. Treasury yields

pushed higher on Thursday with two-year yields breaching 5% for

the first time since November, as investors worried over

rebounding inflation despite the release of softer-than-expected

March producer prices data.

Yields, which move inversely to prices, had soared on

Wednesday on the back of hotter-than-anticipated inflation data

that has raised doubt over the Federal Reserve's ability to

lower interest rates this year. The selling pressure continued

on Thursday, though to a smaller extent.

"Typically when you get a big shock like that markets

take about three days to normalize. Day two, we're still

squaring some positions, some late tap-on-the-shoulder sellers

are out there," said Guy LeBas, chief fixed income strategist at

Janney Montgomery Scott.

The producer price index rose 0.2% month-on-month in March,

below an expected 0.3% increase. Meanwhile, the number of

Americans filing new claims for unemployment benefits fell more

than expected last week, suggesting the labor market remained

fairly tight.

Benchmark 10-year yields were last seen at

4.574%, about one basis point above Wednesday's levels. Two-year

yields, which tend to more directly reflect

expectations on monetary policy, briefly breached 5% but

declined later and were last at 4.956%, slightly lower on the

day.

While producer prices for March were welcome news, investors

were still scarred by Wednesday's release of the consumer price

index, which showed inflation remains sticky.

"The big event really was yesterday's CPI," said Michael

Reynolds, vice president of investment strategy at Glenmede.

"September is probably our best guess for a first rate cut,

but that means you have to see inflation get back down ... and

we just haven't seen that yet this year," he said.

After Wednesday's inflation data traders have trimmed their

expectations for rate cuts this year to less than two, below the

three cuts Fed officials had penciled in last month. On

Thursday, fed funds futures were showing expectations of a total

of about 43 basis points of cuts this year.

Several global brokerages have also pushed back their rate

cut expectations, with some seeing a cut only in December.

"PPI ran cool in March, but not by enough to negate the

signal from the first quarter's hot CPI reports," Bill Adams,

chief economist for Comerica Bank, said in a note. "The Fed will

likely wait until the third quarter to begin reducing interest

rates," he said.

Fed officials on Thursday said there was

no urgency

to ease, with Boston Fed President Susan Collins saying the

strength of the economy and uneven retreat of inflation argued

against a near term push to lower rates.

The Treasury sold $22 billion in 30-year notes with a high

yield of 4.671%, which was about 1 basis point above the

expected rate at the time of the bid deadline, a sign that

investors demanded a premium to absorb the issuance.

Yields on 30-year bonds at 4.66% added

nearly three basis points on Thursday.