*

ADP report shows private payrolls increased by only 37,000

jobs

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ISM services PMI drops to 49.9, indicating contraction

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Markets price in 74% chance of Fed rate cut in September

(Updates to afternoon US trading)

By Chuck Mikolajczak

NEW YORK, June 4 (Reuters) - U.S. Treasury yields fell

sharply on Wednesday, after labor market data came in weaker

than expected, while a separate report on the services sector

unexpectedly showed contraction.

The ADP National Employment Report showed private payrolls

increased by 37,000 jobs last month, well short of the 110,000

estimate of economists polled by Reuters, after a downwardly

revised rise of 60,000 jobs in April, sending yields lower.

Yields then extended their declines after the Institute for

Supply Management said its non-manufacturing Purchasing Managers

Index dropped to 49.9 last month, below the 52.0 estimate of

economists polled by Reuters. The reading was the first below

the 50 threshold, which indicates contraction of the services

sector, and the lowest reading since June 2024.

In addition, the ISM's measure of prices paid for services

inputs rose to 68.7, the highest level since November 2022, from

65.1 in April.

"It still doesn't seem clear that it's time to cut rates

yet, there's still too much uncertainty, too many unknowns,"

said JoAnne Bianco, partner and senior investment strategist at

BondBloxx Investment Management in Chicago.

"We haven't actually seen the tariffs really translate into

what's happening in terms of inflation."

The yield on the U.S. 10-year Treasury note fell

9.5 basis points to 4.365% after dropping to 4.349%, its lowest

since May 9, and was on pace for its fourth decline in five

sessions.

Labor market data is also expected throughout the week,

culminating in Friday's government payrolls report.

Markets have been volatile since U.S. President Donald Trump

announced a slew of tariffs on countries around the globe on

April 2, only to pause some and declare new ones, with the

10-year yield touching a 3-month high of 4.629% on May 22.

In the wake of the ADP report, Trump again called for Federal

Reserve Chair Jerome Powell to lower interest rates in a social

media post.

The yield on the 30-year bond shed 9.7 basis

points to 4.886%.

Washington doubled tariffs on imported steel and aluminum to 50%

on Wednesday, the same day by which Trump had wanted trading

partners to make their best offers to avoid other import levies

from taking effect in early July.

Trump is expected to speak with Chinese leader Xi Jinping,

days after Trump accused China of violating a deal to roll back

tariffs and trade restrictions.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of economic

expectations, was at a positive 48.6 basis points.

Many Federal Reserve officials have indicated a patient approach

to determining the effect the levies may be having on prices,

although they have also indicated rate cuts may still be

possible this year.

Markets are pricing in a roughly 75% chance of the first cut

of at least 25 basis points from the central bank this year at

its September meeting, according to LSEG data.

The two-year U.S. Treasury yield, which typically

moves in step with interest rate expectations, declined 8 basis

points to 3.877% after hitting a session low of 3.858%, its

lowest since May 9.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities was last at 2.336%

after closing at 2.389% on Tuesday.

The 10-year TIPS breakeven rate was last at

2.307%, indicating the market sees inflation averaging about

2.3% a year for the next decade.