* U.S. Q2 advance GDP lower than expected * U.S. initial jobless claims were higher than forecast * U.S. 10-year TIPS yield hits new record low * U.S. 7-year note auction was worst in four months -analyst (Recasts, adds analyst comment, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, July 29 (Reuters) - U.S. Treasury yields inched higher on Thursday, but were below their peaks for the day, after a soft 7-year note auction added to the positive risk tone which persisted all day despite weaker-than-expected U.S. data. Overall, U.S. yields have been on a downward trajectory over the last couple of months. Since mid-May, U.S. 10-year yields have fallen about 40 basis points. A Federal Reserve statement on Wednesday that suggested the U.S. central bank is inching closer to reducing its asset purchases had limited impact on the market, as yields stalled. A Fed tapering would typically reduce the appeal of Treasuries, pushing yields higher. "The Fed thinks they can taper and the economy can keep growing," said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management in Philadelphia. "They think they can hike rates and the economy can keep growing and they can hike more. I don"t think the bond market is buying it," he added. Treasury yields initially fell on Thursday after the release of softer-than-forecast U.S. economic data, but came slightly back up. The advance estimate for U.S. gross domestic product in the second quarter showed the economy grew at a 6.5% annualized rate, lower than market forecasts for an 8.5% rise. In a separate report, U.S. initial jobless claims were at 400,000 for the latest week, higher than consensus expectations of 380,000. U.S. stocks looked past the U.S. data, with the Dow and S&P 500 hitting fresh intraday record highs earlier due in part to a slate of strong corporate earnings reports. Upbeat Chinese news on regulation that pushed their shares higher added to the sanguine mood on Wall Street, as did strong European economic reports on euro zone investor sentiment and German inflation. Thursday"s U.S. 7-year auction was lackluster, with a yield of 1.05%, higher than the expected rate at the bid deadline of 1.042%, suggesting that investors wanted a little more yield to take the note. The bid-to-cover ratio, a gauge of demand, was 2.23, below both the 2.36 last month and what analysts said was the 2.33 average. "Bid to cover at 2.23x reflected a preference for either 5s or 7s in this environment," Jim Vogel, senior rates strategist at FHN Financial, said in a research note after the auction. "Dealers are not stepping up this week, with a share of only 22.2%. It"s the worst 7-year auction in four months." In late afternoon trading, the U.S. 10-year Treasury yield was up a little at 1.267%. U.S. 30-year yields were little changed at 1.913% from Wednesday"s 1.911%. Post-auction, U.S. 7-year note yields were slightly higher at 1.024% In other parts of the Treasury market, the yield on 10-year Treasury Inflation-Protected Securities (TIPS) plunged to a fresh record low of -1.175%, as investors priced in higher inflation going forward. Penn Mutual"s Ren said the record low yields on 10-year TIPS, also known as real yields, is a "pessimistic signal" on the economy. July 29 Thursday 3:45PM New York / 1945 GMT Price Current Net Yield % Change (bps) Three-month bills 0.045 0.0456 -0.005 Six-month bills 0.0525 0.0532 0.002 Two-year note 99-217/256 0.2015 -0.009 Three-year note 100-4/256 0.3697 -0.016 Five-year note 99-124/256 0.7303 -0.010 Seven-year note 101-128/256 1.0248 0.005 10-year note 103-76/256 1.2659 0.003 20-year bond 106-236/256 1.8314 0.000 30-year bond 110-128/256 1.9111 0.000 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.50 0.00 spread U.S. 3-year dollar swap 11.75 0.25 spread U.S. 5-year dollar swap 8.75 0.75 spread U.S. 10-year dollar swap 2.75 0.75 spread U.S. 30-year dollar swap -23.75 1.75 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio and Sonya Hepinstall) Our Standards: The Thomson Reuters Trust Principles.