TREASURIES-U.S. 10-year yield dips below 3 pct before jobs data
* August U.S. payroll data seen pivotal for Fed tapering
* A bond rebound seen short-lived before next week's supply
NEW YORK, Sept 6 (Reuters) - Benchmark U.S. yields slipped below 3 percent on Friday, as traders awaited the government's payroll report which could reinforce expectations the Federal Reserve might decide to scale back its bond purchase stimulus soon.
The labor market will be a key factor in the Fed's decision on whether to cut back on its bond purchases, known as quantitative easing or QE. Policymakers want to see the unemployment rate closer to 6.5 percent from its current 7.4 percent, which was the lowest since December 2008.
Economists polled by Reuters forecast U.S. employers added 180,000 jobs in August, leaving the unemployment rate unchanged from July at 7.4 percent, the lowest since December 2008. The non-farm payrolls report is due at 8:30 a.m. (1230 GMT).
With $65 billion of coupon-bearing supply scheduled next week, a bond rally from any disappointment in the payrolls report will likely be short-lived, traders and analysts said.
"With long-end Treasury supply next week, accounts will be willing to sell rallies on a weaker set of numbers," said Tom di Galoma, head of fixed-income rates sales at ED&F Man Capital in New York.
Benchmark 10-year Treasury notes last traded up 10/32 in price, yielding 2.957 percent, down 3.9 basis points from late on Thursday. The 10-year yield touched 3.007 percent overnight, a level not seen since July 2011.
The two-year note yield, which is most sensitive to changes in perception on the Fed's rate policy, was 0.502 percent, down 1.6 basis points from Thursday's close. It traded above 0.50 percent for the first time since June 2011 on Thursday.
The U.S. economy, while continuing to improve, has not shown signs of accelerating. In fact, the surge in mortgage rates this summer due to the spike in bond yields might be slowing the housing recovery, analysts said.
Moreover, possible U.S. military action against Syria for its alleged use of poison gas against civilians has stoked worries about a disruption of Middle East oil exports, propelling oil prices higher and exerting a drag on the global economy, they added.
These factors, together with another possible showdown on the federal debt ceiling between President Barack Obama and Congress, might cause policy-makers to refrain from shrinking the Fed's current $85 billion monthly purchases of Treasuries and mortgage-backed securities at its Sept. 17-18 meeting.
On Thursday, bond yields here and Europe jumped to levels not seen in at least 1-1/2 years as investors stampeded out of low-yielding government debt partly on a surprisingly strong report on the U.S. services sector.
Adding to worries about the end of QE has been speculation on how quickly the central bank might increase its policy rate from its current near zero range after it stops buying bonds.
Uncertainty over the timing on the Fed's first rate hike, which would be the first such move since June 2006, lifted yields on short-dated Treasuries or the short-end of U.S. yield curve to their highest level since June 2011.
The latest bond sell-off also pushed the yields on short-dated Treasury Inflation Protected Securities into positive territory, something which has not occurred since February 2011.
TIPS yields are commonly referred to as "real" yields because they reflect investors' expectations on economic growth and investment returns excluding inflation.
"The era of financial repression has officially ended," TD Securities interest rate strategist Richard Gilhooly wrote in a research note published late Thursday.
"The liquidation process has driven the move to higher real yields as the Fed signaled the winding down of QE and economic data this week has suggested some acceleration in the path of activity even as rates spike higher," he said.