TREASURIES-Bonds sell off as jobs data eases economy fears

* Growth in Aug private payrolls weighs on Treasury prices

* Benchmark yields rise to three-week highs

* Market eyes supply of 3s, 10s, and 30s due next week (Adds analysts comments, updates prices, changes byline)

By John Parry

NEW YORK, Sept 3 (Reuters) - U.S. Treasuries prices fell for a third straight day on Friday as U.S. labor market data alleviated fears the world's biggest economy may succumb to a double-dip recession.

The data, which showed that employment declined less than expected in August, curbed investors' demand for safe-haven U.S. government debt and pushed benchmark yields up to three-week highs.

"Before the payrolls number this morning the Treasury market was positioned for a looming chance of the double-dip scenario and/or the Japan scenario that amounted to really no recovery at all," said Jay Mueller, senior portfolio manager with Wells Capital Management in Milwaukee, Wisconsin.

But Treasuries sold off because "although I would call the report very mediocre, that is a big step up from disastrous," Mueller said.

The Labor Department said overall U.S. employment fell for a third straight month in August, but the drop was far less than the market expected. And the private sector, considered a better gauge of labor market health, added 67,000 jobs, exceeding forecasts. For details on jobs report, see [ID:nN02227856].

For now, Treasury yields, which move inversely to prices, could continue to rise, provided that data continues to signal that the United States will skirt recession, analysts said.

Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi in New York, cited 3 percent as the target for the benchmark 10-year Treasury note's yield. The yield on Friday was at 2.71 percent, up from 2.625 percent US10YT=RR on Thursday.

The 30-year bond US30YT=RR traded down 1-10/32 in price, for a yield of 3.79 percent, versus 3.72 percent on Thursday.

The jobs data accelerated investors' shift into riskier assets that started earlier in the week, sending stocks higher and putting more downward pressure on Treasuries prices.

"We've seen some pretty hefty asset allocation trades out of bonds and into stocks," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

Bonds erased some losses, however, when an index of activity in the nation's non-manufacturing sector came in weaker than expected. The employment component of the Institute for Supply Management services index was below 50, a reading that points to a decline in hiring.

But most market catalysts weighed on Treasury prices.

The market faces issuance next week with the Treasury auctioning three-, 10- and 30-year securities.

The looming supply provided an "extra incentive to cheapen up the Treasury market a little," Rupert said, noting that before a long holiday weekend, huge market moves might not be sustained.

Analysts warn, however, that Treasuries could soon find favor again. The apparent relief over the economy from some of this week's data could ebb, reviving demand for less risky U.S. government debt.

Stubbornly high U.S. unemployment and the weak housing market could push down the benchmark 10-year Treasury note's yield US10YT=RR to about 2.35 percent over the next two months, said Jack Malvey, a New York-based capital markets consultant and formerly Lehman Brothers' chief global fixed-income strategist. But by next year, signs of economic recovery will likely push the yield back up to 3 percent, Malvey added. (Additional reporting by Ellen Freilich and Burton Frierson Editing by Leslie Adler)