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.

Two-year Treasury notes US2YT=RR were up 3/32 for a yield of 0.95 percent versus 0.99 percent on Thursday. During the session, two-year yields fell as far as 0.93 percent, their lowest since early June.

The U.S. bond market was closed on Friday in observance of the U.S. Independence Day holiday.

Meanwhile, the Fed bought $7 billion in Treasuries maturing in five to seven years as part of its quantitative easing program to stimulate the economy. The U.S. central bank will conduct another Treasury purchase operation on Thursday.

(Additional reporting by Richard Leong, Editing by Chizu Nomiyama)