TREASURIES-Yields fall as stagnant wages ease inflation fears

(Adds quotes, July performance of long bonds, updates prices)

* Yields fall after data shows wages flat in July

* Data offsets inflation fears from labor costs increase on

Thursday

* Yield curve steepens as Fed seen having more time before

hike

By Karen Brettell

NEW YORK, Aug 1 (Reuters) - U.S. Treasuries prices gained on

Friday after jobs data eased concerns about rising wage

inflation, and reduced expectations that the Federal Reserve may

act sooner than some had anticipated to increase interest rates.

Yields have risen since strong growth of gross domestic

product for the second quarter, reported on Wednesday,

buttressed sentiment that the economy is gaining momentum.

The debt weakened further on Thursday on inflation fears

after data showed U.S. labor costs rose the most in more than

5-1/2 years in the second quarter, a sign that a long-awaited

acceleration in wage growth may be imminent.

Data on Friday, however, showed that average hourly earnings

rose only one cent. The figure is closely monitored as a

potential signal of reduced slack in the labor market that could

prompt the Fed to raise rates.

"The market was running scared after yesterday's

outperformance of the employment cost index," said Gennadiy

Goldberg, an interest rate strategist at TD Securities in New

York. "Overall, it's a pretty positive report. The only really

disappointing part of it is wages, and that should help calm the

market."

Benchmark 10-year notes were last up 15/32 in

price to yield 2.51 percent, down from 2.58 percent before the

jobs data was released.

Short- and intermediate-dated debt, which is the most

sensitive to interest rate expectations, outperformed on Friday

and the yield curve steepened as investors unwound bets that had

sent the curve to its flattest levels in five-years.

Tame inflation is seen as giving the Fed more time to

continue its stimulus before raising interest rates, which many

see as likely to occur next year.

"The number gives the Fed a little bit more credibility and

a little bit more time, which is why you're seeing the unwind of

flatteners," said Sean Murphy, a Treasuries trader at Societe

Generale in New York.

The yield curve between five-year notes and 30-year bonds

steepened to 162 basis points, and is up from a

five-year low of 149 basis points on Wednesday.

Rick Rieder, chief investment officer of fundamental fixed

income at BlackRock (NYSE: BLK - news) , sees the curve as likely to resume

flattening, however, as liquidity dries up for August and as

investors continue to grapple with Fed policy.

"In August, liquidity is not as high. Rates will drift

higher. The front-end of the curve will lead the market higher,"

he said.

Longer-dated Treasuries were among the few bond markets that

posted positive returns in July, as investors searched for lower

risk assets and extended duration to reach higher yields.

Treasuries that mature in 20 years or longer produced a

total return of 0.66 percent, the best U.S. bond category in

July and so far in 2014, according to data by Barclays (LSE: BARC.L - news) .

(Additional reporting by Richard Leong, Editing by Nick

Zieminski and Meredith Mazzilli)