Short-dated Treasury yields pared gains on Thursday and a closely watched part of the Treasury yield curve steepened as an uptick in unemployment claims added to the view that the Federal Reserve is likely to begin cutting interest rates in September.

Initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 243,000 for the week ended July 13, the Labor Department said on Thursday. Economists polled by Reuters had forecast 230,000 claims for the latest week.

“That's a little bit weaker than expected … and you're seeing the curve steepen a little bit on that,” said Dan Mulholland, head of rates – trading and sales at Crews & Associates in New York.

Interest rate sensitive two-year yields were last up 1.5 basis points on the day at 4.444%, but down from around 4.455% before the data.

Benchmark 10-year yields rose 2.7 basis points to 4.173%.

The yield curve between two-year and 10-year notes steepened one basis point on the day to minus 27 basis points.

Yields have tumbled this month as softer jobs data and easing inflation boost the odds of an impending rate cut.

“The primary driver is the weakening economic data,” said Mulholland. “Anything involving inflation and employment is going to be super important.”

Fed officials including New York Fed President John Williams on Wednesday cited progress in bringing inflation back closer to their 2% annual target, but also said that they want to see further improvement before cutting interest rates.

That leaves traders focused on economic releases for further clues on Fed policy.

A rate cut in September as seen as a sure thing, while a reduction at the Fed’s July 30-31 meeting is seen as having very low odds. Traders will watch comments from Fed Chair Jerome Powell at the July meeting for any firm signals that a rate cut is coming in September.

Market participants are also focused on the U.S. Presidential election in November, which Donald Trump is seen as the leading candidate to win.

Trump's odds of winning the presidency increased after he survived an assassination attempt on Saturday. Online betting site PredictIt showed bets of an election win at 65 cents for Trump, up from Friday's 60 cents, with a victory for Kamala Harris at 27 cents and Joe Biden at 18 cents.

Analysts say that a Trump presidency could reignite inflation as a result of more pro-business policies, tax cuts and tariffs.

Longer-dated yields are likely to rise relative to shorter-dated ones in any scenario, however, with the U.S. government facing higher budget deficits that will require more Treasury supply. Shorter-dated debt will be relatively better supported by Fed rate cuts.

The U.S. government will sell $19 billion in 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday.

(Reporting By Karen Brettell, Editing by Nick Zieminski)