TREASURIES-Yields surge on better-than-expected economic data, debt supply worries

(Adds context, analyst quotes, graphic; updates market levels)

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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 rose on Wednesday after data showed continued U.S. economic resilience and a Treasury refunding announcement indicated 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 data on jobs and the services sector eroded market confidence in additional monetary easing by the Federal Reserve.

The rise in yields gained momentum during the day, as the

U.S. Supreme Court began hearing arguments

on Wednesday over the legality of Donald Trump's sweeping tariffs. The prospect of lower revenue from tariffs - taxes on imported goods - could lead to wider government budget deficits and more Treasury debt supply hitting the markets.

"The Supreme Court taking the oral arguments today reminds everybody that this is still out there and it's pretty binary in its impact," said Art Hogan, chief market strategist at B. Riley Wealth. 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. 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.

"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. Rates futures traders assigned a 61% 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 late on Wednesday. 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 nearly seven basis points to 4.159%, while two-year yields rose by almost five bps to 3.632%. Further out the curve, 30-year yields rose to 4.738%, adding nearly seven bps on the day. The Treasury Department on Wednesday said it expected to keep its nominal coupon and floating rate note auction sizes steady for at least the next several quarters, but was 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 52.8 basis points, the steepest in over two weeks.

"On the margin it was a little bit hawkish compared to what markets expected," said Jan Nevruzi, a rates strategist at TD Securities, referring to the refunding announcement.

"We didn't really subscribe to the idea that they're going to cut auction sizes, but there was definitely chatter of that ... In fact, they did a complete U-turn to the other direction with the fact they're preliminarily considering increases to future coupon and FRN auction sizes," he said.

(Reporting by Davide Barbuscia, Karen Brettell; Editing by Andrea Ricci)