TREASURIES-Modest gains on view Fed will not soon raise rates

* Prices up, yields ease slightly from three-week highs

* Fed's Bernanke says economy improving, faces headwinds

* Surprisingly small drop in payrolls hurt bonds on Friday

* Market looking ahead to Treasury sales of 3s, 10s, 30s

By Ellen Freilich

NEW YORK, Dec 7 (Reuters) - U.S. Treasury prices rose on Monday after bond investors took a breath and realized the Federal Reserve was not going to raise interest rates soon, despite the slower pace of U.S. labor market deterioration.

Treasuries appeared more secure in the plus column when Fed Chairman Ben Bernanke told the Economic Club in Washington D.C. there was some way to go before policymakers could be sure the U.S. economic recovery could be self-sustaining.

Bernanke forecast modest growth in 2010, enough to lower the jobless rate slowly, but said the economy still faced considerable headwinds.

On Friday, bond prices fell because news of shrinking job losses in November argued the case for economic recovery and raised the prospect of less monetary accommodation next year.

Analysts said Bernanke's comments reassured bond investors the low job-loss count reported for November did not mean the Fed would hurry to raise interest rates.

"(Bernanke was) appropriately cautious about the outlook," said Mark Zandi, chief economist at Moody's economy.com in West Chester, Pennsylvania.

Two-year notes US2YT=RR, which are particularly sensitive to changing views on Fed policy rose 3/32 in price, their yields easing to 0.795 percent from 0.84 percent on Friday when two-year notes suffered their worst sell-off since June.

Speaking at the Reuters Investment Outlook 2010 Summit economist Henry Kaufman said on Monday even if the Fed did raise interest rates later next year, the impact of such a move on financial markets should not be exaggerated.

If the Fed did raise the federal funds rate target from its current range of zero to 25 basis points to 50 basis points, that would still mean that the rate was "exceedingly low," said Kaufman, president of the financial consulting firm Henry Kaufman & Company Inc in New York.

Even a fed funds rate of one percent would be exceedingly low, he said, adding that the Fed would be unlikely to move rates in a dramatic fashion and that rate hikes would lag the economic recovery, not move contemporaneously.

The Fed won't use a "sledge hammer," and any rate increase would be accompanied by "conciliatory language," Kaufman said.

TREASURY AUCTIONS AHEAD

Analysts said the need to underwrite three Treasury auctions this week, could keep bond prices from climbing much further.

The U.S. Treasury plans to sell $40 billion in three-year notes, $21 billion in re-opened 10-year notes, and $13 billion in re-opened 30-year bonds on Tuesday, Wednesday and Thursday, respectively.

"Supply will once again challenge the market, but less so given last week's yield adjustment," said John Spinello, chief fixed-income technical strategist at Jefferies in New York.

On the other hand, remaining skepticism about the sustainability of an economic recovery would be supportive for Treasuries, Spinello said.

The benchmark 10-year Treasury note US10YT=RR was up 12/32, its yield easing to 3.43 percent from 3.48 percent on Friday.

In addition, strong seasonal demand for U.S. government debt at year end should be supportive, analysts said.

Buying emerged on Monday when the 10-year yield moved toward 3.50 percent and the front end held support, he said.

Support for the 10-year Treasury note now lies in the area between 3.47 percent and 3.51 percent and selling should emerge when the yield eases back to 3.425 percent percent to 3.375 percent, Spinello said.

The Fed will release its October report on consumer installment credit at 3 p.m. ET (2000 GMT).

Economists polled by Reuters expect that release to show that consumer installment credit shrank $9.5 billion in October after contracting $14.80 billion billion in September.

The 30-year long bond US30YT=RR rose 10/32, its yield easing to 4.38 percent from 4.40 percent on Friday.

(Additional reporting by Richard Leong; editing by Andrew Hay)