* Treasuries rally as jobs data adds to economic fears
* US CDS costs fall as some hope debt deal more likely
* Rates futures rise as Fed expected on hold for longer (Adds comments, updates prices, rewrites throughout)
By Karen Brettell
NEW YORK, July 8 (Reuters) - U.S. Treasury prices rallied on Friday after a dismal jobs report renewed fears the economy is slowing, and led to some speculation that lawmakers may now be less likely to push through harsh spending cuts, or risk harming the economy further.
Jobs growth ground to a near halt in June as employers hired the fewest workers in nine months, frustrating hopes that data would start to show an improving economy into the second half of the year. For details see [ID:nN1E7670C0].
The report also came less than a month before the Treasury is expected to reach its debt limit, which if not raised could lead to a potentially catastrophic U.S. default.
"There's a lot of crosscurrents here for fixed income investors," said Gary Pollack, managing director at Deutsche Bank Private Wealth Management in New York.
"The economy remains weak as we enter the second half and there are budget negotiations going on in Washington with regard to further declines in government spending, which would be negative for the economy," he said.
Republicans are demanding an agreement to cut the country's fiscal deficit be reached before raising the debt ceiling, though Democrats fear that the sharp spending cuts they advocate would further weaken the economy.
The cost to insure Treasuries for five years using credit default swaps dropped sharply on Friday in a sign investors may see a debt deal as more likely after the weak jobs report.
The CDS costs fell by 5 basis points to 50 basis points, or $50,000 per year to insure $10 million in debt for five years, according to data by Markit.
They had risen 6 basis points this week to close at 55 basis points on Thursday, their highest closing level in almost one and a half years, though the price still reflects a very low probability of default.
Anxiety of a recession also spurred a stampede into short-term interest rates futures on Friday on expectations that the Federal Reserve will keep interest rates near zero into late 2012 to support the fragile economy.
Rates contracts for 2012 delivery posted the strongest one-day gain in more than four months.
Lingering concerns over the European debt crisis also propelled benchmark yields to their biggest single-week drop in about three months, analysts said.
"You have a double whammy working right now. They point to these lower yields," said John Herrmann, senior fixed income strategist at State Street Global Markets in Boston.
Benchmark 10-year notes US10YT=RR were last up a point in price to yield 3.02 percent, down from 3.14 percent late on Thursday and the lowest yields since June 28.
Thirty-year bonds US30YT=RR also rose 1-15/32 in price, with yields testing 4.28 percent, their 50-day moving average and the 38.2 percent retracement of the yield rise from August 2010 to January 2011. The yields fell from 4.37 percent on Thursday.
Possibly stemming Treasuries from rallying even further were some concerns that $66 billion in new three-year, 10-year notes and 30-year bonds risk low demand next week.
This is because the auctions will be the first large test of demand since the Federal Reserve ended its $600 billion bond purchase program at the end of June.
The rally was also reined in because U.S. primary dealers had not bet heavily against Treasuries in advance of the payrolls report, analysts said.
Primary dealers -- Wall Street firms that deal directly with the Federal Reserve -- slashed their short positions in Treasuries last week. They held $26.87 billion in net short positions in Treasuries as of June 29, $19.16 billion less than the previous week, Fed data released late Thursday showed. (Additional reporting by Richard Leong in New York and Ann Saphir in Chicago; Editing by James Dalgleish)