TREASURIES-US yields rise as investors gauge data, impact of tariffs

By Chuck Mikolajczak

NEW YORK, March 5 (Reuters) - U.S. Treasury yields were mostly higher on Wednesday in choppy trading, as investors gauged a mixed bag of economic data while assessing the uncertainty surrounding U.S. President Donald Trump's tariffs on major trading partners.

Yields initially dipped after the ADP National Employment Report showed private payrolls increased by only 77,000 jobs last month, well short of the 140,000 estimate of economists polled by Reuters, after an upwardly revised 186,000 gain in January.

The data was the latest in a string of economic reports that has raised concerns about a slowing economy and has nudged up market expectations for the timing and magnitude of interest rate cuts from the Federal Reserve this year.

But yields reversed course after the Institute for Supply Management (ISM) said its nonmanufacturing purchasing managers index (PMI) climbed to 53.5 last month, above the forecast of 52.6 in a Reuters poll, from 52.8 in January. A reading above 50 signifies expansion.

Along with concerns about a slowing economy, uncertainty has swirled around Trump's tariffs announcements and their effect on prices, as well as the impact on the labor market from actions by the Department of Government Efficiency (DOGE) under Elon Musk to downsize the federal government.

Commerce Department Secretary Howard Lutnick, speaking in an interview on Bloomberg TV, said the administration will make an announcement later on Wednesday regarding the U.S. tariffs that were imposed on Canada and Mexico on Tuesday as President Donald Trump weighs potential relief for some sectors such as automobiles.

"What you're seeing right now is Trump ran on a lot of things, a lot of the issues, but the three that affect the markets the most, at least in my opinion, are regulations, taxes, and tariffs," said Scott Welch, chief investment officer at Certuity in Potomac, Maryland.

"Too early to tell, but (tariffs) have the potential of being inflationary and of slowing economic growth ... and so, what you've seen over the last week or so is just a sort of a flight to quality, a de-risking, if you will, in the face of increased market uncertainty."

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 4.9 basis points to 4.259%.

The ADP data was the first in a string of labor market data this week, which will culminate with the release on Friday of the government's payrolls report for February.

The yield on the 30-year bond US30YT=TWEB rose 5 basis points to 4.566%.

FED RATE CUTS

Market expectations that the Fed may have latitude for more rate cuts this year than recently thought due to a slowing economy have been growing. Traders now are pricing in 73 basis points of cuts by the U.S. central bank this year, after earlier views saw the Fed reducing rates by less than 50 basis points, according to LSEG data.

Expectations for a Fed cut at its meeting in early May briefly climbed above 50% on Tuesday and last stood at 43.2%, up from about 28% a week ago, according to CME Group's FedWatch Tool.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 30.9 basis points after rising to 31.1, its highest since February 4.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 0.8 basis points to 3.947%.

New York Fed President John Williams said on Tuesday he expects the Trump administration tariffs to drive up inflation to some degree, but believes that the central bank's interest rate policy for now is in the right place and does not need to be changed.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.574% after closing at 2.6% on Tuesday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.349%, indicating the market sees inflation averaging about 2.3% a year for the next decade.