TREASURIES-Benchmark yields hit nearly 2-week low after weak US data

* 10-year yields fall to lowest since Aug. 1

* Retail sales, producer price data miss expectation

* Investors reduce expectations for Fed hike

* Yield decline exacerbated by dollar fall vs yen

By Dion Rabouin

NEW YORK, Aug 12 (Reuters) - Benchmark U.S (Other OTC: UBGXF - news) . Treasury yields

fell to their lowest level in nearly two weeks on Friday after

weaker-than-expected readings on U.S. retail sales and producer

prices suggested U.S. inflation may not be gaining steam and

that the Federal Reserve could be slow to raise overnight

interest rates.

U.S. retail sales were flat for July, missing economists'

expectations for a modest 0.4 percent rise, and producer prices

recorded their biggest drop in nearly a year last month on

declining costs for services and energy products.

"The relationship is pretty straightforward, with low

inflation and low growth comes lower interest rates," said Guy

LeBas, chief fixed income strategist at Janney Montgomery Scott

LLC in Philadelphia.

Fed fund futures showed investors reduced their bets the Fed

would raise rates before the end of the year. Traders see a 43

percent chance the Fed hikes rates by its December meeting,

versus a 52 percent chance on Thursday, according to CME Group (Kuala Lumpur: 7018.KL - news) 's

FedWatch tool.

Yields on benchmark 10-year Treasury notes fell

to their lowest since Aug. 1 after the data, touching a low of

1.48 percent. The 30-year Treasury bond hit its

lowest yield since Aug. 5, at 2.21 percent.

The 10-year note was last up 24/32 in price for a yield of

1.49 percent, down about 8 basis points from the late Thursday

close. The 30-year Treasury bond rose 1-9/32 in price to yield

2.229 percent, about 7 basis points lower than Thursday's close.

The biggest move in yields was in the seven-year note

, which fell about 9 basis points to 1.33 percent.

The move was exaggerated by buying of the Japanese yen,

LeBas said. Longer-dated Treasury yields have moved largely in

concert with the yen in recent months, dropping as the

dollar has declined against the Japanese currency.

U.S. Treasuries have attracted more overseas investors as

government debt in other developed markets like Japan has moved

to negative yields at maturities up to 10 years. Ten-year

Japanese government bonds currently yield -0.101 percent,

meaning investors lose money if they hold them to maturity.

(Reporting by Dion Rabouin; Editing by Dan Grebler)