(Adds Treasury auction details in paragraph 14, comment on growth in paragraphs 8-9, ECB news in paragraph 11, comment on ECB, auction in paragraph 12,15, updates prices)
NEW YORK, Jan 25 (Reuters) - Treasury yields fell on Thursday as investors bid up prices on news the U.S. economy grew faster than expected in the fourth quarter, while data showed the pace of inflation remained on track to meet the Federal Reserve's 2% target.
U.S. gross domestic product increased at an annualized 3.3% in the last quarter, the Commerce Department's Bureau of Economic Analysis said, a growth rate surprisingly faster than the 2.0% rate that economists polled by Reuters had forecast.
Yet inflation pressures subsided, with the personal consumption expenditures (PCE) price index increasing just 1.7% over the past three months from 2.6% in the third quarter.
Bond yields, which move inversely to their price, slid. The yield on two-year Treasuries, which reflects interest rate expectations, fell 7.4 basis points to 4.304%. The yield on benchmark 10-year notes fell 5.6 basis points to 4.122%.
The report confounded some economists, as strong growth and slowing inflation are at odds.
"My view is this combination of data is very, very unusual and it's not likely to be sustained," said Tom Simons, money market economist at Jefferies in New York.
"Either inflation is going to pick back up again or growth has to slow. I just don't understand how the economy can continue with this perfect, ideal, immaculate disinflation story."
Real gross domestic income has not kept pace with GDP growth, suggesting the economy may not be as strong as it appears, said Joe Lavorgna, chief U.S. economist in New York at SMBC Group.
Also, massive government spending is keeping demand stronger than it otherwise would be, he said in a note.
Expectations that the Fed will cut interest rates in March rose to 47.4% from 41.2% on Wednesday, according to CME Group's FedWatch Tool.
Earlier, the European Central Bank kept rates unchanged at a record-high 4%, as expected. Bond yields plunged as investors bet the ECB has both the growth and inflation outlook wrong and will deliver five rate cuts starting in early spring.
Treasury yields fell as the ECB press conference began as the U.S. market tried to keep pace, said Tom di Galoma, a managing director and co-head of global rates trading at BTIG.
The Fed is expected to keep its target rate unchanged at 5.25%-5.50% when policymakers meet next week.
The Treasury Department sold $41 billion in seven-year notes at a high yield of 4.109%, with primary dealers taking 13.9%.
"Whenever the dealers take less than 15%, it's a very good sign that there's a lot of demand," di Galoma said.
The 30-year Treasury bond yield was down 4.2 basis points at 4.372%.
The difference in yields on two- and 10-year notes flattened further to -18.3 basis points. The curve has been inverted since July 2022, with the shorter-dated security's yield higher than the longer-dated one, in what has proven to be a recession harbinger.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.272%.
The 10-year TIPS breakeven rate was last at 2.282%, indicating the market sees inflation averaging about 2.3% a year for the next decade. (Reporting by Herbert Lash; Editing by Richard Chang and Nick Zieminski)
