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

before the Treasury Department sells $42 billion in 10-year

notes and as stocks continued to stabilize, reducing demand for

the safe haven U.S. debt.

Treasury 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 after Friday's employment report

for July showed an unexpected increase in the unemployment rate,

while jobs gains also came in below economists' forecasts.

With no major economic releases this week to drive market

direction, the market is largely consolidating above more than

one-year yield lows reached on Monday.

"Trying to find out where the exact kind of resistance

levels are on the Treasury curve is a work in progress," said

Michael Lorizio, senior fixed income trader at Manulife

Investment Management in Boston.

Lorizio expects Wednesday's sale of 10-year Treasuries to

see good demand from investors, though it's possible that yields

will rise before the sale as corporate issuers also come to

market.

"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," Lorizio said.

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

three-year notes on Tuesday. It will also sell $25 billion in

30-year bonds on Thursday.

Yields on interest rate-sensitive two-year notes

were last up 2.3 basis points on the day at 4.005%, after going

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

Benchmark 10-year note yields rose 5.5 basis

points to 3.943% after reaching 3.667% on Monday, the lowest

since June 2023.

The gap between two- and 10-year Treasury notes

shrank 3 basis points to minus 6.6 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, but

they are also pricing in a 39% 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 and analysts say

concerns about such a move were overblown.

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.

Traders are also focused on whether there will be more

unwinding of leveraged trades involving the Japanese yen, which

has been blamed as a key factor behind recent weakness in

international stock markets.

Selling the Japanese currency and buying U.S. assets has

been a popular trade in recent years due to the wide interest

rate differential between the U.S. and Japan. This trade has

come under pressure due to a strong yen rally due to

intervention by Japanese authorities and an unexpectedly large

rate hike by the Bank of Japan.

Rising geopolitical tensions in the Middle East could also

increase demand for U.S. Treasuries.