(Adds Barkin comments, updates prices) By Chuck Mikolajczak NEW YORK, Oct 14 (Reuters) - U.S. Treasury yields fell on Thursday after data on the labor market and inflation eased worries the Federal Reserve may need to take action earlier than expected to combat rising prices, with shorter-dated notes poised to snap an extended run higher. Weekly initial claims for state unemployment benefits dropped 36,000 to a seasonally adjusted 293,000 versus expectations of 316,000. Other data showed the producer price index for final demand increased 0.5% in September after advancing 0.7% in August and was just shy of the 0.6% estimate. Shorter-term yields have risen over the past two days while longer dated yields have dipped, which has served to flatten the yield curve, indicating the market is anticipating a rate hike by the Fed. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.4 basis points at 0.354% and poised for its first decline after seven straight days of gains, its longest streak since June. The gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, fell for a third straight day to hit 115.6 basis points, its lowest level since September 24 and was last at 116.4. "With all the supply-demand situation going on with goods coming into the country, economists are starting to feel that maybe GDP won’t be what it is supposed to be, it will probably be around the 2 to 3 percent level," said Tom di Galoma, managing director at Seaport Global Holdings in New York. "Short-term we got to levels where the market found buyers." The yield on 10-year Treasury notes was down 3 basis points to 1.519%. St. Louis Fed President James Bullard said the current high levels of inflation may not abate as soon as many Federal Reserve policymakers expect, and again urged the central bank to pursue a faster taper of its bond-buying program. San Francisco Federal Reserve Bank President Mary Daly on Thursday said inflation and employment have made enough progress for the U.S. central bank to begin scaling back its monthly bond buying, but is far from ready for interest rate hikes. Tom Barkin, President of the Richmond Federal Reserve, said he does not expect the Fed"s plan to begin to taper its asset purchases to hobble economic growth, but it could be a "positive" move in setting expectations for inflation. The yield on the 30-year Treasury bond was down 1.7 basis points to 2.024%. October 14 Thursday 2:48PM New York / 1848 GMT Price US T BONDS DEC1 160-4/32 0-15/32 10YR TNotes DEC1 131-124/256 0-68/256 Price Current Net Yield % Change (bps) Three-month bills 0.045 0.0456 -0.005 Six-month bills 0.0575 0.0583 0.000 Two-year note 99-204/256 0.3541 -0.014 Three-year note 99-250/256 0.6329 -0.029 Five-year note 99-36/256 1.0533 -0.034 Seven-year note 99-92/256 1.3467 -0.030 10-year note 97-140/256 1.5194 -0.030 30-year bond 99-120/256 2.0238 -0.017 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 13.50 0.50 spread U.S. 3-year dollar swap 14.25 0.75 spread U.S. 5-year dollar swap 7.50 0.25 spread U.S. 10-year dollar swap 1.00 0.00 spread U.S. 30-year dollar swap -24.25 -0.75 spread (Reporting by Chuck Mikolajczak; Editing by Will Dunham and Diane Craft) Our Standards: The Thomson Reuters Trust Principles.