TREASURIES-Bonds fall on strong service data, upcoming supply
* U.S. ISM services index rebounds from three-year low
* Treasury to sell $72 billion in coupon supply
* Profit-taking after Friday's rally also cited
* Fed bought $1.496 billion in long-dated Treasuries
NEW YORK, Aug 5 (Reuters) - U.S. government debt prices fell on Monday as traders trimmed bond holdings after surprisingly strong data on the U.S. services sector and before auctions of new coupon supply. Profit-taking after last week's late rally - based on a weaker than forecast July employment report - also weighed on bond prices, as did a little lightening of positions ahead of Treasury refunding auctions this week, traders said. U.S. bond prices erased just some of Friday's rise in advance of this week's August refunding during which the Treasury will sell $72 billion worth of coupon-bearing debt. "Bond prices fell on a combination of an early morning pullback after Friday's rally before supply this week, and then the stronger than expected ISM Non-Manufacturing data," said John Briggs, managing director, markets at RBS in Stamford, Connecticut. The Institute for Supply Management's index on the U.S. services sector rose to 56.0 from 52.2 in June, signaling ongoing improvement in retail, restaurant and other services industries. Analysts had forecast a July reading of 53.0. The latest ISM services figure matched the level last seen in February and rebounded from a three-year low.
SUPPLY AHEAD The Treasury Department will sell $32 billon in three-year debt on Tuesday, $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday. With yields hovering near two-year highs, the upcoming supply might entice income-oriented investors who have stayed on the sidelines. On the open market, benchmark 10-year notes slipped 10/32 in price to yield 2.64 percent, up from 2.60 percent late on Friday. The 30-year bond was down 24/32, its yield rising to 3.74 percent from 3.69 percent late on Friday. Exiting from weekend safe haven positions due to U.S. embassy closures in the Middle East and Africa after an al Qaeda threat also caused Treasury yields to rise. While U.S. payrolls grew 162,000 last month, falling short of traders expectations, analysts said the slower hiring might not be enough to keep the Federal Reserve from scaling back its bond-purchase stimulus as early as September. Nancy Vanden Houten, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey, said she believed the Fed would announce some cutbacks in bond purchases at its September policy meeting and begin to carry them out in October. A couple of factors could color that decision, though, she said. Disappointing job growth in August, for instance, could make the Federal Reserve more reluctant, or cautious, about reducing its monetary stimulus. Another is a potential showdown over the debt limit, Vanden Houten said. If Congress refuses to raise the debt limit, that could add to the U.S. fiscal restraint that many say is already hampering the economy's recovery. "We've heard Bernanke express concerns about that, and if they were on the fence, that could tip them toward holding off