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Economic data erodes confidence in Fed rate cuts

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Treasury considers future increases in coupon debt issues

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U.S. Supreme Court hears arguments on Trump's tariffs

By Davide Barbuscia

NEW YORK, Nov 5 (Reuters) - U.S. Treasury yields turned

higher on Wednesday, reversing earlier declines, after data

surprises to the upside showed continued economic resilience,

and on the back of a Treasury refunding announcement indicating

potential future increases in long-dated debt issues.

Yields, which move inversely to prices, had declined

overnight because of safe-haven demand spurred by stock market

fears of an AI-fueled bubble. However, bond selling pressure

resumed in morning trading, lifting yields, as

better-than-expected jobs data and services sector data eroded

market confidence in additional monetary easing by the Federal

Reserve.

"Traditional (economic) drivers like retail and professional

services are lagging ... nonetheless, we continue to see a

strong job market," said David Russell, global head of market

strategy at TradeStation. "The data is not necessarily bad

enough to trigger rate cuts," he added.

Private employment increased by 42,000 jobs in October after a

smaller-than-initially reported decline of 29,000 in September,

the ADP National Employment Report showed on Wednesday.

Economists polled by Reuters had forecast private employment

would rise by 28,000 jobs after a previously reported drop of

32,000 in September.

The Institute for Supply Management said its nonmanufacturing

purchasing managers index rose to 52.4 last month from 50.0 in

September. Economists polled by Reuters had forecast the

services PMI climbing to 50.8. The services sector accounts for

more than two-thirds of U.S. economic activity.

Rates futures traders assigned a 64% probability to a 25

basis point rate cut by the Fed at its next policy meeting in

December, down from about 70% prior to Wednesday's data

releases, LSEG data showed.

The ADP report was closely watched by investors because a U.S.

government shutdown - now the longest ever - has frozen monthly

employment reports produced by the Labor Department's Bureau of

Labor Statistics, seen as key gauges of U.S. economic health.

"The ADP employment data continue to point to a gradual

slowing in the labor market," said Matthew Martin, senior

economist at Oxford Economics. "We believe the Federal Reserve

provided enough support to the labor market with their two

back-to-back rate cuts to remain on hold at the next two

meetings," he said in a note.

Benchmark 10-year yields rose by five basis

points to 4.139%, while two-year yields rose by about

four bps to 3.625%. Further out the curve, 30-year yields

rose to 4.722%.

The Treasury Department on Wednesday said it expects to keep its

nominal coupon and floating rate note auction sizes steady for

at least the next several quarters, but is beginning to consider

future increases.

This added some upward pressure on long-term yields, pushing

the yield curve to steepen - meaning the premium of long-dated

yields over shorter ones increased. The closely watched curve

comparing two- and 10-year yield steepened to 52 basis points,

the steepest in over two weeks.

Angelo Manolatos, an analyst at Wells Fargo, said in a note

that the Treasury market reacted to early considerations about

increases in coupon issuance. "This guidance pretty much takes

coupon cuts off the table and creates a risk Treasury may even

increase sizes as early as November 2026," he said.

Meanwhile, adding uncertainty to the markets, the U.S. Supreme

Court began hearing arguments on Wednesday over the legality of

Donald Trump's sweeping tariffs.

"If there's a sense that the tariffs are going to be reduced

by the courts, that could have some potential pressure on the

long end of the (yield) curve," said Russell at TradeStation, as

lower tariff revenue could lead to wider government budget

deficits and more Treasury debt supply hitting the markets.