TREASURIES-Data and supply weigh on longer dated bonds

* Treasury's $8 bln, 10-yr TIPS sale draws robust demand

* Stronger-than-expected ISM services data hits long end

* Fed buys $7 bln in debt maturing in 2014 to 2016 (Updates market with late New York trade)

By Burton Frierson

NEW YORK, July 6 (Reuters) - Longer-dated U.S. Treasury debt prices fell on Monday as government debt auctions raised supply concerns and a surprisingly strong report on the services industry revived hopes of an economic rebound later this year.

A report showed the U.S. service sector was still shrinking last month, but the pace of contraction slowed and activity was at its highest since September 2008. [ID:nN06492915]

The data reinforced the view that recovery was taking hold, however slowly. This supported shorter-dated debt on the notion that the Federal Reserve is likely hold rates steady for now, keeping two-year yields at one-month lows.

It raised inflation risks for longer-date bonds while supply worries also weighed. The government is bringing $73 billion worth of bonds to market this week, though the auctions kicked off on Monday with a well-received sale of Treasury Inflation-Protected Securities.

"Really, the overriding factor for the market-place is supply," said Tom di Galoma, head of fixed income rates trading at Guggenheim Capital Markets LLC, a New York-based brokerage.

"I kind of feel there has got to be some kind of setback in the market."

Benchmark 10-year Treasury notes US10YT=RR were down 4/32 in price, yielding 3.50 percent versus 3.49 percent on Thursday. The 30-year long bond US30YT=RR was down 18/32, yielding 4.35 percent versus Thursday's close of 4.31 percent.

Bonds came back from their lows after the government's $8 billion auction of 10-year TIPS.

Shorter-dated Treasury notes were higher, continuing to find support from the surprisingly weak jobs data last Thursday.

That data supported the notion the Federal Reserve will leave its near-zero interest rate policy unchanged in the foreseeable future in a bid to end the worst recession in decades.

A return to economic growth, together with massive government borrowing, would exert upward pressure on inflation, which erodes the value of long-dated Treasuries and their cash flow.

The TIPS auction will be followed by a $35 billion sale of new three-year notes on Tuesday; a $19 billion auction of older 10-year debt on Wednesday; and an $11 billion re-opening of 30-year bonds on Thursday.