By David Randall NEW YORK, Jan 3 (Reuters) - Benchmark 10-year Treasury yields briefly climbed above 4% before dipping lower on Wednesday as investors waded through data to gauge whether the U.S. economy is set for a soft landing. Yields plummeted to six-month lows in December following signs of cooling inflation and signals from the Federal Reserve that its most aggressive hiking cycle since the 1980s was over. Yet over the last two weeks yields have inched upward as traders re-evaluate their expectations of rate cuts. Markets are pricing in a 25% chance that the Fed holds benchmark rates in their current range of 5.25% to 5.5% at its March policy meeting, up from a 21% chance seen yesterday, according to CME's FedWatch Tool. Futures markets see a 67% chance of 25 basis point rate cut. "This will really be a data-dependent Treasury market as the Fed looks to maybe walk back some of the dovishness from their last meeting" said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management. The yield on 10-year Treasury notes was down 1.7 basis points at 3.927%. It briefly rose as high as 4.1% earlier in the day. The yield on the 30-year Treasury bond was down 1.3 basis points to 4.071%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 1.1 basis points at 4.339%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -41.3 basis points, down approximately 5 basis points from its level late Tuesday. U.S. manufacturing contracted further in December, continuing the longest such stretch since the period from August 2000 to January 2002, the Institute for Supply Management (ISM) said on Wednesday. Job openings, a measure of labor demand, fell by 62,000 to 8.790 million on the last day of November, the Labor Department said in its monthly Job Openings and Labor Turnover Survey, or JOLTS report. Economists polled by Reuters had forecast 8.850 million job openings. The labor data "is good news for American workers and the economy, but it also suggests to me that the Fed is unlikely to cut rates as aggressively in 2024, as markets currently indicate, given the risk of re-igniting inflationary pressures," said Ron Temple, chief market strategist at Lazard. Earlier in the day, Richmond Federal Reserve President Thomas Barkin said a soft landing is "increasingly conceivable," but cautioned that risks remain. "That's why the potential for additional rate hikes remains on the table," he said, with the timing and pace of any rate cuts determined by whether inflation continues to fall. January 3 Wednesday 1:07PM New York / 1807 GMT Price Current Net Yield % Change (bps) Three-month bills 5.24 5.3988 0.021 Six-month bills 5.0525 5.2721 0.013 Two-year note 99-213/256 4.3388 0.011 Three-year note 100-194/256 4.0985 -0.001 Five-year note 99-64/256 3.9169 -0.007 Seven-year note 98-226/256 3.9343 -0.015 10-year note 104-164/256 3.9274 -0.017 20-year bond 106-224/256 4.2343 -0.014 30-year bond 111-176/256 4.07 -0.014 (Reporting by David Randall; Editing by Barbara Lewis, Emelia Sithole-Matarise and Nick Zieminski)
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