* Yields fall to three-week lows after weak jobs report * Short and intermediate-debt most volatile on rate speculation * Fed buys $1.24 bln TIPS due 2040-2043 By Karen Brettell NEW YORK, Jan 13 (Reuters) - U.S. Treasuries prices rose on Monday, extending Friday's rally as investors reduced bullish expectations for economic growth after employers added far fewer jobs in December than traders and economists had expected.
The yield on the benchmark 10-year note fell to a three-week low, after registering the largest one-day fall since October on Friday on news U.S. employers added only 74,000 workers in December, far short of the 196,000 rise forecast by analysts polled by Reuters.
The Merrill Lynch MOVE index, which estimates future volatility of long-term bond yields, plunged on Friday to its lowest level in two months, falling to 61.2 from 73.7 on Thursday.
The yield drop erased all losses since the Federal Reserve said on Dec. 18 that it would reduce the size of its monthly bond purchases, which had helped send benchmark 10-year yields to two-and-a-half-year highs of 3.041 percent earlier this month.
Ahead of Friday's jobs numbers, investors had been betting that the U.S. economy would expand at a quicker level, with fiscal drags from the government shutdown and debt ceiling risks now in the rear-view mirror.
"There had been some people talking up extreme growth this year," said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York. "This (employment report) undermined the super strong growth scenario, and now you are left with decent growth, but not anything to speed up tightening dramatically." Three- and five-year notes, which have been the worst performers since the Fed's December meeting, were among the best bid after Friday's jobs data.
The lower-than-expected jobs gain is not yet seen as likely to alter the Fed from its course of reducing bond purchases, which were cut by $10 billion to $75 billion a month and are seen as likely to be further pared over coming months.
But speculation over when the Fed is likely to begin raising interest rates from rock-bottom levels is likely to keep short- and intermediate-dated debt volatile, with expectations over when a rate hike could begin varying from mid-2015 to 2016.
"I think that's really where the volatility is going to be as far as those forward rate expectations are," said Tom Tucci, head of Treasuries trading at CIBC in New York. "We had some liquidation since the Fed meeting in the front end of the market, and I think some of that is slowly creeping back in as people realize the Fed's nowhere near removing that type of accommodation." Five-year notes were last up 4/32 in price to yield 1.592 percent, down from a high of 1.755 percent on Friday before the jobs data.
Benchmark 10-year notes rose 6/32 in price to yield 2.831 percent, down from a high of 2.967 percent on Friday. Thirty-year bonds increased 13/32 in price to yield 3.7775 percent, down from Friday's high of 3.891 percent.
The president of the Atlanta Federal Reserve Bank, Dennis Lockhart, cautiously endorsed further cuts to the stimulative bond-buying program on Monday, warning that the labor market has not yet healed and that there are worrisome signs of disinflation in the economy.
The Fed bought $1.24 billion in Treasury Inflation-Protected Securities due between 2040 and 2043 on Monday as part of its ongoing purchase program. It will purchase between $1 billion and $1.50 billion in bonds due from 2036 and 2043 on Tuesday.
The economic calendar was light on Monday. The next major release is data on retail sales for December on Tuesday, which may have been negatively impacted by weather.