Treasurys down on better-than-expected data

NEW YORK (CNNMoney.com) -- Treasurys fell Wednesday after better-than-expected data showed that the service sector expanded and private sector payrolls increased for sixth straight month.

What prices are doing: The benchmark 10-year note dropped 8/32 to 104-24/32, and its yield rose to 2.94%. Bond prices and yields move in opposite directions.

The 30-year bond fell 3/32 to 105-17/32 and its yield rose to 4.06%. The 2-year note slipped 2/32 to 100-4/32, with a 0.57% yield, while the 5-year note declined 10/32 to 100-20/32, with a lower 1.55% yield.

What's moving the market: Demand safe haven appeal of U.S. debt fell as investors welcomed a report that said private-sector employers added jobs in July. Payroll processing firm Automatic Data Processing said private-sector employers added 42,000 jobs to their payrolls during the month, following an upwardly revised 19,000 increase in June. Economists surveyed by Briefing.com were only looking for employers to add 25,000 jobs during the month.

The reports come as investors await Friday's monthly jobs report from the Labor Department, one of the most closely-watched indicators on Wall Street.

Separately, the Institute for Supply Management's non-manufacturing purchasing managers' index unexpectedly rose to 54.3 in July, from 53.8 in June. Economists were expecting the reading to fall to 53.0 during the month.

What's on tap: Bond traders are also anticipating new supply from a $74 billion quarterly refunding announced by the Treasury Department on Wednesday.

The government said it will auction $74 billion in bonds next week to refund $33 billion of securities that are maturing, and to raise another $41 billion.

The Treasury announces refundings each quarter.

Treasury plans to bring $34 billion worth of 3-year notes to market on Tuesday; $24 billion in 10-year notes next Wednesday; and $16 billion in 30-year bonds on Thursday. The auctions will settle on Aug. 16.

What analysts are saying: "We had strong economic numbers this morning on the service sector expansion and private sector job growth," said Richard Bryant, head of Treasury trading at MF Global. "With those numbers, and the rally we had yesterday, there was room for retracement."

Bryant added the next few days will be critical as traders evaluate the strength and extent of the economic recovery.

"The direction for Treasurys will hinge on the July jobs report due Friday and the next Fed statement coming on Tuesday," he said.

But to prepare for the refunding cycle, Bryant said traders will drive Treasury prices lower ahead of the 10-year note and 30-year bond auctions next week.

"It's certainly going to be a challenge to digest the upcoming supply when yields are so low," he said. "If Treasurys end up rallying after the jobs number and the FOMC statement, we'll see some volatility in the market because traders will need to make some concessions prior to the auctions."