TREASURIES-U.S. bond prices fall before 3-year note supply
* U.S. begins Nov. refunding with 3-year note sale
* Benchmark yields hit highest levels since mid-Sept.
* Fed purchases $1.565 billion in long-dated Treasuries
NEW YORK, Nov 12 (Reuters) - U.S. Treasuries prices fell on Tuesday as investors made room for this week's government debt supply in the aftermath of a surprisingly strong reading on job growth in October.
Bond yields earlier rose to their highest level since mid-September but were still lower than a month ago.
It is unclear whether the higher yield levels will bolster bidding at this week's November refunding, in which the Treasury Department will sell $70 billion in debt.
"We have had a nice pickup in yield concession, but there is some supply congestion at the front end of the curve," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Bank in New York.
Keeble noted some $100 billion in Treasury bills are slated for sale on Tuesday and Wednesday, which might complicate bidding for the new three-year note issue.
The last refunding of 2013 will begin with the auction of three-year notes at 1 p.m. (1800 GMT), followed by a $24 billion sale of 10-year debt on Wednesday and a $16 billion auction of 30-year bonds on Thursday .
Last month's 204,000 payroll gain, which easily beat estimates that had expected a big toll from the 16-day federal government shutdown, supported the view of a stronger economy that bolsters the case for higher stock prices in the coming months, said James Swanson, chief investment strategist at MFS Investment Management in Boston.
"The bond market is not a place to make money. It's a place to diversify," Swanson said.
Wall Street stock prices fell after hitting record highs on Friday. The Dow on Monday finished at a record closing high.
The upbeat hiring news kindled speculation about the chances the Federal Reserve might start to shrink its $85 billion in monthly bond purchases at its December policy meeting rather than early 2014.
Still, the jobs report contained enough worrisome data about labor conditions that some economists reckon the central bank will refrain from scaling back its third round of quantitative easing, which was implemented a year ago with the goal to stimulate growth.
In the meantime, the Fed bought $1.565 billion in Treasuries that mature from February 2036 to February 2043, part of its latest QE3 purchase.
Overnight trading volume was heavier than usual after the U.S. bond market was closed on Monday for the Veterans Day holiday. About $50 billion of Treasuries changed hands in the cash market as of 8 a.m. (1300 GMT), 34 percent above the 20-day average, according to ICAP, the biggest interbroker dealer of U.S. government debt.
On the open market, three-year notes were down 3/32 in price, yielding 0.622 percent, up 3 basis points from late on Friday. Benchmark 10-year Treasury notes slipped 8/32 in price to yield 2.778 percent, up 3 basis points from late on Friday.
In "when issued" activity, traders expected the upcoming new three-year note issue to yield 0.650 percent, below the 0.710 percent at the three-year auction in October.
Given the lack of major economic data this week, some analysts pointed to a Senate panel's nomination hearing on Fed Vice Chair Janet Yellen to succeed Ben Bernanke as Fed chairman as a likely market-moving event. Yellen is widely seen continuing the Fed's current ultra-loose monetary policy and is an architect of its bond-purchase programs.
Traders are keen for any clues at Yellen's appearance on whether she might signal the Fed is considering sticking with its current pace of bond purchases into the latter half of 2014, Credit Agricole's Keeble said.
"She's gotten a very dovish reputation, but I think she's quite pragmatic," said Jack Flaherty, a portfolio manager for the GAM Unconstrained Bond Strategy in New York.
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