(Updated at 1500 EDT)

By Karen Brettell

Aug 7 (Reuters) - U.S. Treasury yields rose on Wednesday

after the Treasury Department saw soft demand for a $42 billion

sale of 10-year notes and as companies rushed to sell debt as

risk appetite improved.

Supply is the main focus this week as traders wait on fresh

economic data for further clues on the strength of the U.S.

economy.

Yields tumbled to more than one-year lows after Friday's

employment report for July showed an unexpected increase in the

unemployment rate, while jobs gains also came in below

economists' forecasts, raising fears of an imminent recession.

Tumbling stock markets partly blamed by traders unwinding

popular dollar/yen carry trades, in which they sold the Japanese

currency and bought U.S. assets, added to demand for safe haven

U.S. debt.

This demand has since ebbed as stocks move higher, but

Treasury yields remain well below where they have recently

traded, which was seen as denting interest in Wednesday's debt

auction.

The 10-year notes sold at a high yield of 3.96%, 3 basis

points above where they traded before the sale. Demand was 2.32

times the amount of debt on offer, the weakest since December

2022.

"Investors just weren't willing to pay up for sub-4% 10s,"

said Vail Hartman, U.S. rates strategist at BMO Capital Markets

in New York. "This suggests this move may still have a little

bit further to run before dip buyers reemerge in a more

meaningful way."

Heavy corporate debt issuance also pushed yields higher.

"You have a lot of issuers who paused on Monday and even

maybe held back yesterday just to make sure the coast was clear

in terms of how risk assets are going to be received and now are

coming to market today," said Michael Lorizio, senior fixed

income trader at Manulife Investment Management in Boston.

Yields on interest rate-sensitive two-year notes

were last up 1.8 basis points on the day at 4.0034%, after going

as low as 3.654% on Monday, the lowest since April 2023.

Benchmark 10-year note yields rose 8 basis

points to 3.968%, after reaching 3.667% on Monday, the lowest

since June 2023.

The yield curve between two- and 10-year Treasury notes

steepened 4 basis points to minus 4 basis points.

It reached 1.50 basis points on Monday, the first time it has

turned positive since July 2022.

Traders expect the Federal Reserve to cut interest rates by

50 basis points at its next policy meeting on Sept. 17-18 as the

economy slows, but they are also pricing in a 31% chance of a

smaller 25 basis point rate reduction, according to the CME

Group's FedWatch Tool.

The odds of an emergency rate cut before the September

meeting have fallen as risk markets recover.

The next major U.S. economic release will be consumer price

inflation for July on Aug. 14. Comments by Fed Chair Jerome

Powell at the Fed's Jackson Hole Economic Policy Symposium on

Aug. 22-24 may also provide new clues on the path of rate cuts.

Rising geopolitical tensions in the Middle East could also

increase demand for U.S. Treasuries.