TREASURIES OUTLOOK-U.S. bonds could extend rally
* Buyers step in after benchmark yields near 2-year highs
* U.S. to sell $66 billion longer-dated debt this week
* Japanese sold record amount of foreign bonds in June
* Fed bought $1.46 billion in long-dated Treasuries
(Adds information about upcoming events in last 3 paragraphs) NEW YORK, July 8 (Reuters) - Treasury yields near two-year highs and a slightly more skeptical view of last week's U.S. employment report could let the Treasury market build on Monday's gains, analysts said. Prices rose and yields eased on Monday as bargain-hunters recognized value and bought bonds. Yields hit multi-year highs on Friday after a stronger-than-forecast monthly jobs report reinforced speculation the Federal Reserve would soon slow its bond-buying program, designed to drive down interest rates to stimulate the economy and lower unemployment. But after Friday's selloff, market players reconsidered and saw value. "Treasury yields increased and the dollar strengthened on the nonfarm payrolls report as market participants shifted their view as to when the Fed might taper, but that was probably due to a wrong reading of the employment report, which did not show substantial improvement in labor conditions," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin. "There were no signs of strength, let alone anything substantial or sustainable, in the employment report," Jacobsen said. "It's all very superficial." He noted that while the leisure and hospitality sectors added jobs, manufacturing lost jobs and more people were working part time due to economic reasons. Jacobsen took a skeptical view of the notion that the Fed would hasten to reduce its bond purchases. "Tapering is the latest fad," he said. "First it was the fiscal cliff. Then it was the spring swoon. Now it's the taper. Strategists are rushing to be at the front of the herd without considering whether it pays to be in the herd." Friday's selloff, part of a retreat that started after Fed Chairman Ben Bernanke on May 22 spoke about the U.S. central bank trimming its bond purchases, was greeted by some investors as a buying opportunity on Monday as they pushed prices up and yields down. After 10-year Treasury yields rose to 2.755 percent, a level not seen since August 2011, buyers came in, pushing the benchmark 10-year note up 27/32 in price and nudging its yield down more than 10 basis points to 2.646 percent. "The U.S. Treasury market is still a very liquid and safe place to be, and at the long end of the yield curve, you're now getting value with yields well above the inflation rate, so we were not terribly surprised by the snap-back rally we saw on Monday," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management in Kansas City, Missouri. He said the snap-back was more substantial than a one-day reaction. "You've seen almost capitulation-like moves in retail investment vehicles like ETFs and mutual funds," he said. Investors in mutual funds based in the United States pulled $28.1 billion out of bond funds in the week ended June 26, the Investment Company Institute said last week, the heaviest weekly outflow since the group began tracking weekly fund flows in January 2007. New issuance in municipal bonds, investment-grade corporates and high-yield debt has "slowed very dramatically so as investors look to re-deploy cash, the technical environment will improve to where you don't have this tremendous imbalance of sellers versus buyers," Heckman said. As a result, the upward pressure on Treasury yields "over the next couple of months will start to ease a bit," he said. After Friday's U.S. jobs report showed U.S. employers added 195,000 jobs in June, more than half of the major Wall Street bond firms surveyed in a Reuters poll said they expected the Fed to reduce its $85 billion monthly purchases of Treasuries and mortgage-backed securities in September. The bargain-hunting on Monday occurred as the U.S. Treasury Department prepared to sell $66 billion worth of coupon-bearing supply, traders said. Treasury will sell $32 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday, and $13 billion of 30-year bonds on Thursday. On Monday, the 10-year Treasury yield retraced roughly half of its jump on Friday, which was the biggest single-day rise in almost two years. The 30-year bond rose more than a point, sending its yield to 3.637 percent from as high as 3.722 percent, a level not seen since August 2011, according to Reuters data. Mortgage-backed securities also rebounded from steep losses on Friday. Thirty-year 3.5-percent coupon mortgage-backed securities supported by home loans guaranteed by Fannie Mae were up 29/32 in price with a yield of 3.49 percent, down 26 basis points from Friday's close. Heckman said the market would note the Mortgage Bankers Association (MBA) seasonally adjusted index of mortgage applications, due on Wednesday, to see how the interest-rate rise of the last seven weeks had affected demand for mortgages. "Any news releases related to the housing industry will be very important to the market," Heckman said. "If the housing market begins to wither a little bit, you'll see a much better tone out of the bond market." Investors will also pay close attention to Wednesday's release of minutes from the Federal Open Market Committee's June meeting and the weekly jobless claims report due on Thursday.
(Additional reporting by Richard Leong; Editing by Leslie Adler and Jan Paschal)