TREASURIES-Bonds up on low-rates view, shrug off auction

* Prices up, Bernanke's economic "headwinds" view supports

* Gains pared after Treasury's 3-year note auction (Updates after 3-year auction)

By Ellen Freilich

NEW YORK, Dec 8 (Reuters) - U.S. Treasury prices rose on Tuesday, heartened by the realization that despite last week's improved jobs report for November, the Federal Reserve would not be in a hurry to raise interest rates.

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.

Some of that sell-off was reversed on Monday when Fed Chairman Ben Bernanke said modest growth in 2010 would slowly lower the jobless rate but the U.S. economy still faced considerable headwinds.

More of Friday's selling was reversed on Tuesday though the market pared gains slightly after the Treasury's $40 billion auction of three-year notes, the first of three offerings this week.

"Treasuries were trading higher on the day ahead of the auction. Since the results, Treasuries have pulled back slightly, but are still bid on the day," said Ian Lyngen, senior government bond strategist with CRT Capital Group in Stamford, Connecticut.

The benchmark 10-year Treasury note US10YT=RR was up 14/32 in price, its yield falling to 3.38 percent from 3.44 percent on Monday and 3.48 percent on Friday.

Two-year notes US2YT=RR, which are particularly sensitive to changing views on Fed policy, rose 3/32, their yields easing to 0.73 percent from Monday's 0.77 percent.

Yields at the three-year auction came in slightly higher than expectations, reflected in the when-issued market.

Such a result, known as a tail, indicates investors were bidding somewhat aggressively for higher yields and lower prices, though the auction was strong by most other measures of demand.

Meanwhile, dealers pinned the day's gains on the skepticism over the strength of the recovery.

"The skeptical bond market, in an environment of exceptionally low rates, keeps asking for additional proof that the economic recovery is for real and there is no chance of a W-shaped recession or setback to recovery," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.

Economist Henry Kaufman, president of the financial consulting firm Henry Kaufman & Company in New York, said even if the Fed did raise interest rates later next year, it would be unlikely to move in a dramatic fashion.

Rate hikes would lag the economic recovery, not move contemporaneously, Kaufman said at the Reuters Investment Outlook 2010 Summit on Monday.

Raymond Remy, head of fixed-income at Daiwa Securities in New York, said a downgrade by Fitch Ratings of Greece's bond rating to BBB+ on concerns about its fiscal problems also gave the market a bit of a flight-to-quality bid. (Additional Reporting by Burton Frierson; Editing by James Dalgleish)