* Benchmark yields higher, approach levels before Cyprus crisis
* U.S. to sell $99 billion coupon-bearing supply
* U.S. Fed to buy $1.25 bln to $1.75 bln long-dated bonds
* Quarter-end buying seen limiting bond market decline
By Richard Leong
NEW YORK, March 25 U.S. government debt prices fell on Monday after Cyprus clinched a deal that averts a meltdown of its banking sector, rekindling appetite for stocks and other risky investments and reducing demand for low-yielding bonds.
Cyprus reached an agreement this weekend with international lenders to secure a 10 billion euro ($13 billion) bailout before the European Central Bank cut off support for the island nation. The move reduced anxiety that Cyprus' fiscal woes will ripple across the euro zone, causing a global credit crisis.
Benchmark Treasury yields retraced to levels seen a week ago when Cyprus' troubles erupted and ignited a wave of buying in bonds, gold and other perceived low-risk assets.
"It's safehaven buying coming out of the market. It's risk back on," said Larry Milstein, head of government and agency trading in R.W. Pressprich & Co. in New York.
The week's $99 billion in longer-dated Treasury supply and any encouraging domestic economic data will likely exert downward pressure on the bond prices with moves exaggerated by a shortened trading week ahead of the Easter holiday, analysts and traders said.
The Treasury Department will kick off the week's supply with a $35 billion auction of two-year notes on Tuesday; a $35 billion sale of five-year debt on Wednesday and $29 billion auction of seven-year notes on Thursday.
The U.S. bond market will close at 2 p.m. (1800 GMT) on Thursday and shut for the Good Friday holiday.
Supply-related selling should be mitigated by buying from fund managers for quarter-end rebalancing and four purchase operations from the Federal Reserve, analysts said.
The U.S. central bank was set to buy $1.25 billion to $1.75 billion in government debt due in Feb. 2036 to Feb. 2043 at 11 a.m. (1500 GMT).
While Cyprus's bailout calmed some fears about the festering euro zone debt crisis, traders remained wary about fiscal struggles in Spain and Italy whose economies and banking systems are many times larger than the banking system in Cyprus.
"Spain and Italy are still the wildcards. People will continue to keep an eye on Europe," Milstein said.
Without major economic data due on Monday, benchmark 10-year yields will likely test the 2 percent threshold especially if Wall Street stocks rise on optimism in the wake of the Cyprus deal.
Benchmark 10-year Treasury notes traded down 6/32 in price for a yield of 1.949 percent, up 2.2 basis points from late on Friday.
The 30-year bond fell 14/32 in price, yielding 3.172 percent, up 2.3 basis points from Friday.
U.S. stock index futures rose, signaling a higher open on Wall Street, while the MSCI global stock index gained 0.3 percent.