(Updated at 1500 EDT)

By Karen Brettell

NEW YORK, Aug 6 (Reuters) - U.S. Treasury yields rose on

Tuesday as fears that the U.S. economy is quickly entering a

recession were seen as overdone, while safe haven demand for

U.S. bonds also ebbed as stock markets recovered.

Yields tumbled to more than one-year lows on Monday as

investors repriced for rapid interest rate cuts by the Federal

Reserve following an unexpected increase in the unemployment

rate and fewer than expected job gains in July's employment

report on Friday.

Concerns about the knock-on effects of traders unwinding

popular trades in which they sold the Japanese yen and bought

U.S. assets has also been a concern as the yen rallies following

a larger than expected rate increase by the Bank of Japan.

"We had two shocks really in the last week," said Guy

LeBas, chief fixed income strategist at Janney Montgomery Scott

in Philadelphia.

"The first being a downside economic shock evident from

Friday's nonfarm payrolls report and hints of deceleration in

the labor market. The second shock being a positioning shock

related to divergent central bank policy between the Bank of

Japan and the world's other major central banks," LeBas said.

"You put those two things together and you get a recipe for

some choppy action," LeBas added. But, "the idea of pricing in a

very high probability of an intermediate rate cut at a time when

the economy is still growing and there's no obvious crisis is

pretty goofy."

Traders are now pricing in a 68% chance the Fed will cut

rates by 50 basis points at its next scheduled policy meeting on

September 17-18, and a 32% chance of a 25 basis point reduction.

A cut of at least 50 basis points was fully priced in on Monday,

with a 75 basis point cut also seen possible, according to the

CME Group's FedWatch Tool.

Traders had also begun positioning for a possible emergency

rate cut before September.

San Francisco Fed President Mary Daly said on Monday that

many details in the jobs report leave "a little more room for

confidence that we're slowing but not falling off a cliff."

Chicago Fed President Austan Goolsbee also cautioned against

taking too much of a signal from the global market sell-off,

noting it stemmed in part from the Bank of Japan's decision last

week to raise rates, as well as increasing geopolitical tensions

in the Middle East.

U.S. services sector activity on Monday also boosted

confidence in the economy as it rebounded from a four-year low

in July amid a bounce back in new orders and the first increase

in employment in six months.

Despite Tuesday's relative calm there remain concerns that

the Fed will be too slow to cut rates.

Monetary policy works with a lag and "you have to get

out in front of this deterioration before it happens. And

because the labor market itself is an economic lagging

indicator, then the Fed seems to really be setting itself up to

be behind the curve," said Will Compernolle, macro strategist at

FHN Financial.

Given the long wait before the Fed's September meeting, Fed

Chair Jerome Powell may use the Jackson Hole Economic Policy

Symposium on August 22-24 "as a way to ease without easing - to

use forward guidance to essentially cut rates before the Fed

actually cuts rates," Compernolle said.

Yields on interest rate sensitive two-year notes

were last up 10 basis points at 3.983%, after getting as low as

3.654% on Monday, the lowest since April 2023.

Benchmark 10-year note yields rose 10.5 basis

points to 3.888% after reaching 3.667% on Monday, the lowest

since June 2023.

The gap between two- and 10-year Treasury notes

was last at minus 10 basis points, after reaching

1.50 basis points on Monday. It was the first time it has turned

positive since July 2022.

The Treasury saw solid demand for a $58 billion sale of

three-year notes on Tuesday, the first sale of $125 billion in

coupon-bearing debt supply this week.

The debt sold at a high yield of 3.810%, close to where

it had traded before the auction. Demand was 2.55 times the

amount of debt on offer.

The government will also sell $42 billion in 10-year notes

on Wednesday and $25 billion in 30-year bonds on Thursday.

Meanwhile safe-haven demand for Treasuries could return with

rising geopolitical tensions in the Middle East posing a risk to

markets.

The leader of Hezbollah on Tuesday pledged a "strong and

effective" response to the killing of its military commander by

Israel last week no matter the consequences, and said Hezbollah

would act either alone or with its regional allies.