(Adds results of 10-year TIPS auction) By Herbert Lash NEW YORK, July 22 (Reuters) - Yields on U.S. Treasuries eased on Thursday after the auction of $16 billion in 10-year TIPS was bid at a record low, while the latest jobless claims report reinforced expectations the Federal Reserve"s policy stance will remain dovish. The bid at the TIPS auction, the largest ever, was the lowest on record as real rates have never declined so much in the past. The sale was well received with submitted bids 2.50 times the offer, with the 10-year awarded at -1.016% after trading the entire morning cheaper than -1.0%, said Jim Vogel, interest rate strategist at FTN Financial in Memphis. Traders have valued inflation expectations based on what they think investors will worry about next, rarely with any link to fundamentals or communication from the Fed, Vogel said. "Just like nominal UST yields, inflation break-evens have been erratic all month," he said in an e-mail. The number of Americans filing new claims for jobless benefits rose to a two-month high last week, the Labor Department said in a report that nevertheless showed more people are returning to work. Initial claims for state unemployment benefits increased by 51,000 to a seasonally adjusted 419,000 for the week ended July 17, the highest level since mid-May. Economists polled by Reuters had forecast 350,000 applications for the latest week. The yield on 10-year Treasury notes fell 2.2 basis points to 1.260%. The yield on the 30-year Treasury bond slid 3.1 basis points to 1.899%. After several weeks of volatility, the market is settling into a period of equilibrium before the next week"s meeting of the Federal Open Market Committee, said Ben Jeffery, rate strategist at BMO Capital Markets in New York. The 10-year U.S. Treasury yield will likely trade in a range of 1.25% to 1.3%, Jeffery said. The two-day meeting ends July 28. "Trading volumes today are meaningfully lower than they have been all week," he said. "Positions are in the process of starting to be set ahead of next week"s Fed meeting, so we"re expecting a little bit of sideways into Wednesday." Yields on the benchmark note plunged almost 30 basis points to a low of 1.128% early on Tuesday from July 13, when data for June showed the biggest jump in U.S. consumer prices in 13 years. Yields have rebounded about 14 basis points since then. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 105.8 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 0.8 basis points at 0.200%. The breakeven rate on five-year U.S. TIPS was last at 2.491%. The 10-year TIPS breakeven rate was last at 2.3%, indicating the market sees inflation averaging that rate annually for the next decade. July 22 Thursday 1:52PM New York / 1752 GMT Price Current Net Yield % Change (bps) Three-month bills 0.05 0.0507 0.000 Six-month bills 0.05 0.0507 0.000 Two-year note 99-219/256 0.1998 -0.008 Three-year note 100-2/256 0.3724 -0.016 Five-year note 100-208/256 0.7072 -0.024 Seven-year note 101-148/256 1.0138 -0.021 10-year note 103-92/256 1.2599 -0.022 20-year bond 107-28/256 1.8209 -0.030 30-year bond 110-204/256 1.899 -0.031 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.00 -0.25 spread U.S. 3-year dollar swap 10.00 0.00 spread U.S. 5-year dollar swap 8.25 0.75 spread U.S. 10-year dollar swap 0.25 1.00 spread U.S. 30-year dollar swap -27.00 1.75 spread (Reporting by Herbert Lash; Editing by Dan Grebler, Kirsten Donovan) Our Standards: The Thomson Reuters Trust Principles.