By Karen Brettell and Ellen Freilich

NEW YORK, Aug 2 (Reuters) - U.S. Treasuries yields fell from

two-year highs on Friday after weaker-than-expected U.S. job

growth in July added to uncertainty over the timing of when the

Federal Reserve is likely to pare back its bond purchase

program.

Employers added 162,000 jobs in July, fewer than economists

had expected.

Most economists and traders have been expecting that the Fed

will start reducing its $85 billion-a-month bond purchases in

September as the economy gains momentum. Friday's data pushed

back some of those expectations.

'The question of tapering is back up in the air again given

the labor market numbers were mediocre at best,' said Rick

Klingman, managing director in U.S. Treasuries trading at

Societe Generale in New York.

Benchmark 10-year Treasury yields fell to 2.61

percent, down from near two-year highs of 2.75 percent before

the data.

Traders of short-term U.S. interest-rate futures also

boosted bets that the Fed will wait until 2015 before raising

short-term borrowing costs. The contracts, tied to the Fed's

policy rate target, rise in price when traders see a bigger

chance of a later Fed rate hike.

The jobs disappointment is likely to bring even more

scrutiny to data heading into next month's payrolls report,

which will be the last one before the Fed's September meeting.

'The data from here until the September FOMC meeting will be

very important as we are roughly 50/50 whether or not tapering

begins in September,' said Eric Stein, co-director of global

income at Eaton Vance Investment Managers in Boston.

New supply scheduled for next week was seen capping Friday's

price gains.

The Treasury will sell $72 billion in new three-, 10- and

30-year bonds next week.

Short-covering by traders who had bet on a strong number,

however, added to Friday's bid.

July's jobs gains surprised many traders who had been

expecting as many as 200,000 to 250,000 jobs may have been added

during the month.

Some had set up short positions in anticipation that a

strong number would push yields higher.

Weekly Federal Reserve data on dealer positions showed

dealers short by about 14,000 contracts in the six-to-seven-year

range and short about 6,700 contracts in the seven-to-10-year

maturity range as of July 24.

After Friday's move, Treasuries are seen as likely to stay

in their recent range until new data paints a clearer economic

picture.

The tapering debate will remain at center stage as the bond

market goes 'sideways' from here, said Kevin Giddis, senior

managing director and head of fixed income at Raymond James.

'Investors will play it pretty close to the vest until some real

action occurs.'

Separately, the CME Group said it paused trading in

some Treasuries futures for five seconds on Friday before the

jobs report.

CME spokesman Michael Shore said the firm had 'stop logic

events' in the 10- and 30-year Treasuries futures contracts at

8:29:57 a.m. EDT, three seconds before the employment report was

released.

About 173,000 10-year Treasury contracts traded in the

minute before the jobs report came out, with several large

trades in the seconds before the halts.

The CME's halts generally occur after a number of trades

come in that would cause the contract in question to trade

outside a certain defined range.

(Additional reporting by Ann Saphir; Editing by Dan Grebler)

((karen.brettell@thomsonreuters.com)(+1-646-223-6274)(Reuters

Messaging: kare.brettell.thomsonreuters.com@thomsonreuters.net))

Keywords: MARKETS USA BONDS/

(-------MARKET SNAPSHOT AT 2:38 p.m. EDT (1838 GMT)------- Change vs Current Nyk yield Three-month bills 0.035 (-0.01) 0.036 Six-month bills 0.07 (-0.01) 0.071 Two-year note 99-29/32 (+02/32) 0.301 Five-year note 100-02/32 (+20/32) 1.360 10-year note 92-22/32 (+28/32) 2.602 30-year bond 85-09/32 (+31/32) 3.694 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 16.75 (-0.25) U.S. 3-year dollar swap spread 18.50 (+0.50) U.S. 5-year dollar swap spread 17.00 (-0.25) U.S. 10-year dollar swap spread 17.00 (-1.50) U.S. 30-year dollar swap spread -4.75 (-1.75))

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