TREASURIES-More gains on idea Fed will not hike rates soon

* Prices up, Bernanke's economic "headwinds" view supportive * Prices climb despite imminent supply * Treasury to sell $40 bln 3-yr notes at 1 p.m. (1700 GMT) (Updates prices, adds comment on 3-yr 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 despite three Treasury auctions this week, the first of which -- $40 billion in three-year notes -- will take place later in the day at 1 p.m. EST (1800 GMT).

"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.

The benchmark 10-year Treasury note US10YT=RR was up 10/32, its yield falling to 3.40 percent from 3.44 percent on Monday and 3.48 percent on Friday.

Rupkey said the same pattern occurred on August 7 when a stronger-than-expected payrolls report for July caused bond yields to move up before skepticism about the growth outlook re-emerged and yields fell back again.

Two-year notes US2YT=RR, which are particularly sensitive to changing views on Fed policy, rose 1/32 in price, their yields easing to 0.75 percent, below the 0.73 percent yield prevailing on the eve of the November payrolls report.

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.

TREASURY AUCTIONS AHEAD

Analysts said the bond market's recovery from Friday's selloff occurred despite imminent supply.

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.

"The yield curve has steepened to within a few basis points of its recent wides with the $34 billion re-opened 10- and 30-year auctions likely to present a tougher underwriting," said John Spinello, chief fixed-income technical strategist at Jefferies in New York.

Year-end balance sheets remain an issue for the dealer community given another refunding in two weeks of an estimated $118 billion in two-, five- and seven-year notes coming in the last week of the decade, Spinello said.

The three-year auction, however, should benefit from strong year-end demand for U.S. government debt, analysts said.

"(The auction) will be very, very strong; very well bid; it doesn't matter that prices are higher today," Remy said.

In when-issued trading, the three-years to be sold at 1 p.m. (1800 GMT) yielded 1.27 percent.

"In front of the 1 p.m. bidding deadline we could get some cheapening of a basis point or two, but given the environment, the auction probably will go okay," said Tom Di Galoma at Guggenheim Securities in New York.

Galoma said because the three-year is "on the rich side," it might not offer "a lot of post-auction performance."

The 30-year long bond US30YT=RR rose 14/32, its yield easing to 4.36 percent from 4.39 percent on Monday.

(Additional reporting by Emily Flitter; Editing by Carole Vaporean)