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Ten-year yields rise from three-month lows, jobs data in focus

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Updated at 1500 EST

By Karen Brettell

Dec 4 (Reuters) -Benchmark 10-year yields rose from three-month lows on Monday ahead of key employment data due this week, though traders continued to price in the likelihood of the U.S. Federal Reserve cutting interest rates as soon as March following dovish comments from Fed officials last week.

There were no major drivers of direction on Monday and the marketmay be volatile this week as traders watch data for new clueson the strength of the U.S. economy. This week's main focus will be Friday's jobs report for November, which is expected to show that employers added 185,000 jobs during the month. USNFAR=ECI

"We're past month end, so we don't have that assumed demand that you might have before Friday, and looking at a week when we have a lot of risky economic data being published, a lot of it centered on the labor market," said Tom Simons, a money market economist at Jefferies in New York.

Yields briefly pared gains after data on Monday showed that new orders for U.S.-made goodsfell more than expected in October.

Ten-year yields US10YT=RR were last up 6 basis points at 4.288%, after dropping to 4.198% on Friday, the lowest since Sept. 1. The have tumbled from a 16-year high of 5.021% on Oct. 23.

Two-year yields US2YT=RR gained 9 basis points to 4.658%. They reached 4.540% on Friday, the lowest since June 13, and are down from a 17-year high of 5.259% on Oct. 19.

Yields dropped lastweek after Fed Governor Christopher Waller said that he is "increasingly confident" the current setting of the central bank's benchmark interest rate will prove adequate to lower inflation to the Fed's 2% target and nodded to possible rate cuts in a matter of months.

Part of that will be continuing to calibrate the benchmark policy rate against the rate of inflation, with continued declines in the pace of price increases warranting eventual rate cuts - a point other officials have made.

"They may cut rates early next year as a matter of making sure that the real policy rate, the gap between the nominal policy rate minus inflation, doesn't get too wide," Simons said. "If it does, then that puts more undue pressure on the economy and it seems like ... they are not overly concerned about another leg up in inflation."

Fed Chairman Jerome Powell said on Friday that the risks of the central bank slowing the economy more than necessary have become "more balanced" with those of not moving interest rates high enough to control inflation.

Powell also noted that another rate hike could be on the table if needed, however, "markets aren’t really buying it," said Will Compernolle, a macro strategist at FHN Financial in New York. "They’ve kind of moved past this idea of another potential rate hike and are really on the edge of their seats waiting for the first rate cut."

Traders are now pricing in a more than 50% chance of a rate cut in March and see 122 basis points of rate reductions by December 2024. FEDWATCH

Fed officials are in a blackout period ahead of the U.S. central bank's Dec. 12-13 meeting.

A factor possibly supporting bonds, meanwhile, is that commercial banks have increased holdings over the past month, following large reductions.

"For a lot of the last year and a half, especially after (the failure of) Silicon Valley Bank, banks were shedding securities from their balance sheets because they needed to honor these liquidity needs from their depositors withdrawing money and they were afraid of taking on duration risk," said Compernolle.

"The decline in securities on commercial banks balance sheets has slightly reversed through November and so when you have this traditionally big buyer coming off the sidelines that could really reinforce the momentum of lower bond yields," he added.

December 4 Monday 3:00PM New York / 2000 GMT


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Reporting By Karen Brettell; Editing by Will Dunham and Marguerita Choy


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