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

By Chuck Mikolajczak

NEW YORK, March 5 (Reuters) - U.S. Treasury yields climbed on Wednesday, reversing earlier declines, as investors gauged a mixed bag of economic data while navigating 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.

A string of data has raised concerns about a slowing economy and nudged up market expectations for the timing and size of interest rate cuts by the Federal Reserve this year, pushing yields lower in recent weeks.

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.

Uncertainty has also swirled around Trump's tariff announcements and their effect on prices, and the labor market impact from actions by the Department of Government Efficiency (DOGE) under Elon Musk to downsize the federal government.

The White House said Trump will exempt automakers from his 25% tariffs on Canada and Mexico for one month as long as they comply with terms of an existing free trade agreement. He is also open to hearing about exemptions for other products, it added.

"You shouldn't be trading into this kind of turbulence, but it's a function of uncertainty over the tariff policies," 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 benchmark U.S. 10-year Treasury note yield US10YT=TWEB rose 5.9 basis points to 4.269% after reaching 4.284%, its highest since February 27, and was on track for its biggest one day climb since February 18.

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 4.3 basis points to 4.559%.

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 are pricing in 69 basis points of cuts by the U.S. central bank this year, up from previous bets on easings of less than 50 basis points, according to LSEG data.

Expectations for a Fed cut at its early-May meeting briefly climbed above 50% on Tuesday and last stood at 40%, 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 two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 27.3 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, advanced 3.9 basis points to 3.994%.

The Fed said its Beige Book showed economic activity has risen slightly but unevenly since mid-January, employment nudged higher, and prices increased modestly, while businesses and households continued to express optimism amid rising uncertainty about how Trump's policies will affect future growth, labor demand and prices.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.598% after closing at 2.6% on Tuesday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.346%, indicating the market sees inflation averaging about 2.3% a year for the next decade.