TREASURIES-U.S. bond prices fall after 3-year note auction
* U.S. begins November 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. Treasury debt prices fell on Tuesday after a sale of 3-year notes in the aftermath of a surprisingly strong reading on job growth in October.
Benchmark yields hit their highest since mid-September, adding on to increases after nonfarm payrolls gains in October handily beat expectations.
Investors responded to higher yields by boosting bidding at a sale of $30 billion in three-year notes on Tuesday. At 3.46, the bid to cover ratio was the highest since March. The high yield was 0.644 percent.
"This is the lowest yielding 3-year auction since August," noted Thomas Simons, a money market economist at Jefferies & Co in New York.
The Treasury will continue this week's refunding with 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.
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.
Benchmark 10-year Treasury notes slipped 8/32 in price to yield 2.774 percent, compared to 2.746 percent late on Friday.
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.
"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.