* Markets awaiting June nonfarm payrolls data on Friday * Economists in a Reuters poll see payrolls rising 165,000 * Payrolls could set the tone for the next few weeks By Ellen Freilich NEW YORK, July 2 (Reuters) - Interest rates on some Treasury bills briefly turned negative on Tuesday as investors scrambled for cash-like assets in case Friday's U.S. payrolls data leads to volatile trading. Negative rates mean the securities are in so much demand that investors for a short time accepted a return lower than their principal in order to get hold of the securities. Bill rates returned to positive territory, however, as the day wore on. A number of factors contributed to the confluence of demand for U.S. Treasury bills. Higher tax revenue in 2013 combined with federal spending cuts has led to a smaller amount of short-term government debt outstanding, so there is less short-term debt available to potential buyers, money market economists said. Even with less supply, however, several constituencies are "captive buyers," for short-term U.S. debt, said Robert Tipp, chief investment strategist at Prudential Fixed Income, with $400 billion in assets under management, in Newark, New Jersey. Central banks, funds with 'Treasury-only' investment guidelines, and those who need Treasuries to meet collateral requirements all need short-term U.S. debt, even if the returns on those securities are unattractive, he said. Additional demand for U.S. bills is coming from the need to park money that has come out of bond and stock funds in the recent bout of bond and stock market volatility. "The money coming out of those funds invariably sits in cash equivalents as investors try to figure out what the next long-term home for that money is going to be," Tipp said. "This pool of liquidity exacerbates that supply/demand imbalance." Money market funds also bought T-bills and other ultra short-term investments to hold cash from recent redemptions from stock and bond funds, analysts and traders said. The downward pressure on short-term rates has not been limited to the shortest-term securities. "The lack of supply (in bills) is pulling those yields down and that's bringing down yields not only in the bill sector, but is having some influence (farther out on the yield curve), including the two-year note," Tipp said. Two-year notes yielded 35 basis points in late trade on Tuesday, down from 41 basis points a week ago. Mike Cullinane, head of Treasuries trading at D.A. Davidson in St. Petersburg, Florida, said action in the Treasury bill market was probably a delayed, quarter-end effect. "Money funds are likely deploying the cash they have received due to redemptions from other areas. They are parking their cash there (T-bills) until the coast is clear," he said. Last week's quarter-end also apparently left some dealers short T-bills and other coupon issues, leaving them to scramble to cover those trades. Some traders said these dealers were either unwinding shorts before payrolls, or hoped to slowly unwind them by borrowing them via repos. In early Tuesday trading, the interest rates on Treasury bills that mature later this week into late September slipped to near zero. The T-bill issue due on Sept. 5 was quoted at minus 0.25 basis points to minus 1.25 basis points. In late trade, though, three-month Treasury bills yielded 4 basis points; six-month Treasury bills yielded 8 basis points. The drop in T-bill rates also led to a decline in interest rates on repurchase agreements and other money market rates. The rate on overnight repos backed by Treasuries were quoted at 8 basis points, compared with 11 basis points from late on Monday. Repo rates backed by three-year notes moved deeper into negative territory, last trading at minus 35 basis points, while repos backed by 10-year and 30-year Treasuries traded slightly below zero early in the session. The U.S. Treasury Department sold $30 billion in one-month T-bills on Tuesday at an interest rate of 1.5 basis points, matching the level cleared at an one-month bill auction held on Dec. 18. In contrast, investors were reluctant to take large positions in longer-dated Treasuries. "The market's in a bit of a holding pattern as we await Friday's employment report," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut. "Given the relevance of the labor market to the near-term Fed policy decisions, NFP (nonfarm payrolls) will likely set a tone for the market for the next several weeks," he added. The benchmark 10-year Treasury note rose 1/32 in price to yield 2.474 percent on Tuesday, down slightly from 2.477 percent late on Monday. The benchmark 10-year yield reached a 22-month high of 2.67 percent Monday of last week following earlier remarks by U.S. Federal Reserve Chairman Ben Bernanke, who said the central bank could slow its asset purchase program later this year. Treasuries have since recovered a portion of the lost ground as some analysts said the selloff was overdone. Fed officials have also taken pains to point out the bank will not be ready to raise its key interest rate for quite a while yet. Investors are now eyeing Friday's nonfarm payrolls release to gauge the health of the labor market. Fed policymakers want to see the unemployment rate fall to close to 6.5 percent from its current 7.6 percent, with robust and sustained job growth.