TREASURIES-Yields rise on upbeat factory data, payrolls anxiety

* Yields rise before heavy week of economic data

* Strong factory data add to tapering speculation

* Investors nervous before Friday's payrolls report

* U.S. delays T-bill auctions due to test error

By Karen Brettell and Richard Leong

NEW YORK, Dec 2 (Reuters) - U.S. Treasuries yields rose on

Monday as investors took a cautious stance ahead of a heavy week

of data, culminating in Friday's key November employment

report, which will be scoured for signals about the Federal

Reserve's future decisions.

Stronger-than-expected manufacturing in the United States

and abroad spurred selling in U.S. government debt as some

traders reconsidered how soon the U.S. central bank might dial

back its bond purchases, currently at $85 billion a month, if

the economy grows further, albeit at a sub-par pace.

"The clock is ticking," said Eric Green, global head of

rates and currency research and strategy with TD Securities in

New York. "The sentiment is that we are closer to tapering than

further away."

Monday's yield rise followed a weak November for Treasuries

which recorded a 0.33 percent monthly loss as data showed U.S.

economic growth was not derailed by the 16-day government

shutdown in October, according to an index compiled by Barclays (Other OTC: BCLYF - news) .

The Fed is now seen by most as likely to begin reducing bond

purchases at its March meeting. Some think that could be brought

forward to January if domestic employers continue to add workers

at 200,000 a month as reported in October. Some are even

speculating that the Fed could move as soon as this month.

"The risk for the market is a strong number which will bring

the 'tapering talk' front and center," said Chris Harms,

portfolio manager and co-head of the Relative Return team at

Loomis (Other OTC: LOIMF - news) , Sayles & Co. in Boston.

Investors have often become anxious heading into a payrolls

report, seeing a risk that a large jobs number could be the

spark that starts the Fed pullback.

"It's all defense into Friday's number," said Tom Tucci,

head of Treasuries trading at CIBC in New York.

Tucci said it is more likely the U.S. central bank will

provide more guidance over how it plans to hold interest rates

low for some time. "I think what they want to do is outline a

plan, reinforce the lower (rates) for longer with the idea that

that's going to drive a foundation in the market that won't

allow rates to move up too dramatically," he said.

Benchmark 10-year notes were last down 17/32 in

price to yield 2.80 percent, up 6 basis points from late on

Friday. The 10-year yield was 2 basis points short of the

two-month high set more than a week ago.

Thirty-year bonds fell 29/32 in price to yield

3.860 percent, up 5 basis points from Friday.

Treasuries futures also experienced heavy selling with two

block trades of 10-year T-notes totaling 26,600 contracts,

according to data from the CME Group (Kuala Lumpur: 7018.KL - news) .

Treasuries prices fell in overseas trading in reaction to

unexpectedly encouraging data on factory activity in Britain and

the euro zone. Their decline accelerated following data from the

Institute for Supply Management that showed U.S. factory

activity hit a 2-1/2-year high in November, brightening the

economic outlook as the year winds down.

"This is all good news. Early in the expansion,

manufacturing was a star. Now it's picking up again with housing

slowing down," said David Berson, chief economist at Nationwide

Insurance in Columbus (Copenhagen: COLUM.CO - news) , Ohio.

On the supply front, the Fed bought $1.48 billion in bonds

due 2038 to 2043 on Monday as part of its ongoing purchase

program that is aimed at lowering unemployment and averting

deflation. It will purchase debt every day this week, including

two buybacks on Tuesday.

Expectations of heavy corporate debt issuance before the

year-end holiday period also weighed on Treasuries as dealers

and investors made way to absorb the new debt.

Bonds had been boosted through Friday by month-end buying by

portfolio managers to rebalance holdings against benchmark

indexes.

Separately, the Treasury Department said it postponed the

sales of $32 billion in three-month bills and $27 billion in

six-month bills to Tuesday from Monday due to an error that

occurred during a test of its auction system.