TREASURIES-Bonds rise on bargain-hunting before weekend

* Bonds rebound after falling on stock gains, supply fears

* Market wonders whether Fed will expand Treasury purchase (Updates market action, adds new quotes)

NEW YORK, June 19 - U.S. Treasury debt prices rebounded from early losses on Friday on bargain-hunting and as mortgage-related selling tapered off before the weekend.

Bonds had initially traded lower as gains in Wall Street stocks and concerns about next week's record supply of new debt from the U.S. Treasury curbed safe-haven appetite for bonds.

"It seems safe to dip your toes back into the market right now," said Russ Certo, co-head of the rates group at BroadPoint Capital in New York.

On Thursday, concerns over the demand for next week's $104 billion in new government supply and less dire data on jobs and manufacturing unleashed a flood of Treasuries selling.

The sell-off had intensified as investors shed holdings after adding to them this week to stabilize mortgage portfolios.

Friday's trading was light, making the market choppy, traders and analysts noted.

Benchmark 10-year Treasury notes rose 2/32 in price to 94-12/32 after hitting a session low of 93-27/32. Their yield, which moves inversely to prices, was 3.81 percent, down from 3.82 percent late on Thursday and the eight-month high of 4.00 percent seen last week.

The late-morning rise in bonds came despite the stock market holding onto gains tied to an improved economic outlook. The major stock indexes were up 0.2 percent to 1.2 percent.

This view of better times ahead may be supported after a meeting of Federal Reserve policy-makers to be held next Tuesday and Wednesday, analysts said.

"They might indicate a slight improvement in the economy, but there won't be anything dramatic," said John Spinello, head Treasury strategist with Jefferies & Co in New York.

The Fed is widely expected to leave its near zero interest rate policy alone as the worst recession in decade persists in spite of evidence of stabilization in labor and manufacturing.

Traders have been speculating whether the Fed -- the U.S. central bank -- will expand its Treasury purchase program in a bid to hold down long-term rates, which have risen since mid-March.

As they await guidance from the Fed, traders must contend with a record $104 billion of two-, five- and seven-year Treasury notes to be auctioned next week.

The U.S. Treasury will compete with other governments to raise money in the debt market. A French finance agency will sell a 5-year euro debt issue, while Ireland plans to raise about 3 billion euros ($4.18 billion) in 10-year notes.