Updates to afternoon trading

By Chuck Mikolajczak

NEW YORK, July 15 (Reuters) - U.S. Treasury yields declined on Wednesday, with the benchmark 10-year Treasury note poised for its first consecutive daily declines in nearly three weeks, after a second straight day of economic data showed an easing of price pressures.

The Labor Department said the Producer Price Index for final demand dropped 0.3% last month, below the estimate of economists polled by Reuters that called for an unchanged reading, after a downwardly revised 0.6% increase in May.

In the 12 months through June, the PPI increased 5.5% after rising 6.0% in May.

The softer-than-expected data followed the release on Tuesday of the Consumer Price Index report, which showed inflation moderated in June.

"What's going on is that the numbers look decent from the standpoint of the Fed and what (Chairman Kevin) Warsh may do, and for the most part, people are sort of not believing it because they don't see any end to this conflict with Iran," said Tom di Galoma, managing director of global rates trading at Mischler Financial Group in Stamford, Connecticut.

"So the conflict is going to get worse and so the fall in CPI and PPI is really kind of a temporary thing."

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB fell 4 basis points to 4.545% and was on pace for its first back-to-back daily decline since June 26.

IRAN TENSIONS CLOUD OUTLOOK

Energy prices have come down in recent weeks on expectations that a durable peace deal could be reached between the U.S. and Iran. However, hostilities have intensified in recent days and caused a reversal in crude prices to one-month highs.

U.S. crude CLc1 fell 0.11% to $79.25 a barrel and Brent LCOc1 fell to $84.70 per barrel, down 0.04% on the day, easing from earlier highs in part due to a smaller-than-expected drop in U.S. crude oil inventories.

The recent inflation readings have led to a drop in expectations that the Federal Reserve would raise interest rates at its policy meeting later this month, with markets now pricing in a 10.2% chance for a hike of at least 25 basis points, down from more than 40% on Monday, according to CME Group's FedWatch tool. Expectations for an increase at the September meeting, however, are still roughly 50%.

The yield on the 30-year bond US30YT=TWEB shed 1.2 basis points to 5.082%.

CENTRAL BANK AWAITS MORE PROOF

Top Fed officials, including Warsh, on Tuesday welcomed the cooler CPI data, but said they would need more such readings to feel confident that price pressures are truly easing.

Warsh on Wednesday told U.S. lawmakers he feels the Fed is not meeting its price-stability mandate, but declined to give any specifics on how or when he would address the issue.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on 2- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 41.9 basis points.

On Wednesday, New York Fed President John Williams said that while inflation is "unquestionably too high," there are reasons to believe it may have crested and should soon start subsiding, with monetary policy well positioned to guide inflation back to the central bank's 2% target.

Federal Reserve Governor Lisa Cook took a more hawkish stance, and said she is "prepared to act" if inflation does not soon begin to slow, though she is willing to wait "a bit more time" for that to happen.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, tumbled 6.9 basis points to 4.124% and was set for its biggest two-day drop since late March.

The Fed said in its latest "Beige Book" report that economic activity increased slightly in recent weeks, employment rose, and companies and households indicated that inflation may have improved.

The breakeven rate on 5-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.254% after closing at 2.284% on Tuesday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.235%, indicating the market sees inflation averaging about 2.2% a year for the next decade.