* Treasury prices fall as supply surge looms
* Surprising new home sales growth undermines bonds
* Low trade volume as investor wariness grows (Updates to late afternoon trading)
By Mary Angela Rowe
NEW YORK, July 27 (Reuters) - Treasury debt prices fell on Monday, forcing benchmark yields to their highest in over a month, as investors sought to push prices down before this week's upcoming record auctions of government debt.
Surprisingly strong new home sales data further undermined Treasuries, furthering optimism that the economy has bottomed out and decreasing the safe-haven appeal of bonds.
Treasuries are "sagging under their own weight," said William O'Donnell, head of U.S. Treasury Strategy at RBS Securities in Greenwich, Connecticut.
"The patina of supply has colored the market's vision and people are sitting on their hands, waiting for the Treasury auctions to begin in earnest tomorrow," he said.
Trade volumes remained low through the day as investors braced for the Treasury's record $115 billion in new debt to be auctioned this week, including $96 billion in new coupon auctions.
Monday's auction of $6 billion reopened 20-year Treasury Inflation-Protected Securities will be followed on Tuesday by the sale of $42 billion two-year notes. Wednesday will see the auction of $39 billion five-year notes, and $28 billion of seven-year notes will be sold on Thursday.
In preparation for the auctions, seven-year note prices US7YT=RR fell 14/32 to yield 3.29 percent, versus Friday's close of 3.23 percent. Five-year note US5YT=RR prices were last seen 8/32 lower for a yield of 2.59 percent, and two-year note US2YT=RR prices fell 2/32 for a yield of 1.05 percent
Benchmark 10-year note US10YT=RR prices were last seen 16/32 lower, for a yield of 3.73 percent, the highest since late June. Thirty-year bond US30YT=RR prices declined 1-6/32, for a yield of 4.62 percent versus 4.54 percent at Friday's close.
"New home sales just added to the weight," said O'Donnell. U.S. new home sales rose 11 percent month-over-month in June, much higher than the forecast 0.6 percent decline. "With that kind of data and the auctions coming, it maybe prevented people from coming in to buy," he said.
"The housing data helped solidify in a lot of people's minds that things are forming a bottom," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.
But, Klingman said, "you'll see a decent demand" for Treasuries at the auctions because "we have seen some central banks involved already."
O'Donnell characterized the sluggish markets as "waiting to see if the retail investors are going to step up like they have in recent (auctions). People are loath to dive in now, before they see the whites of retail's eyes." (Editing by James Dalgleish)