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US bond prices dive on manufacturing pickup

* Bond losses steepen after U.S. ISM manufacturing report
* Market shrugs off surprise ADP private sector jobs loss
* 10-year yields to fall below 2 pct in Q1 2011 -- B of A (Adds trader quote, updates prices)
By Chris Reese
NEW YORK, Sept 1 (Reuters) - U.S. Treasury debt prices fell on Wednesday as surprisingly strong manufacturing data assuaged some concerns about the health of the global economy and raised appetite for riskier assets.
As money flowed out of safe-haven government debt into stocks, a steep sell-off in Treasuries pushed the 30-year bond's price down over two points, and stocks finished up over 2.5 percent.
The key catalyst for the selling in Treasuries was an unexpected rise in a widely watched national manufacturing index from the Institute for Supply Management.
"With the (ISM report) not only showing a gain from July but completely confounding the consensus of economists for a sharp drop, all of a sudden the economic world is not coming to an end, and that is sharpening the appetite for risk assets," said David Dietze, chief investment strategist at Point View Financial Services, Summit, New Jersey.
Wednesday's economic reports go against recent U.S. housing and employment data that suggested the pace of U.S. economic growth continued to slow markedly.
Some analysts cited market chatter about possible reallocation among longer-term investors into stocks and out of government bonds.
The benchmark 10-year Treasury note lost 28/32 in price, with its yield rising to 2.58 percent from 2.48 percent late on Tuesday. The 30-year Treasury bond price lost 2-12/32 in price with its yield rising to 3.65 percent from 3.52 percent.
With benchmark yields hovering near 19-month lows, trade ranges have been comparatively wide in recent days. Last week 10-year yields dipped to 2.42 percent, the lowest since January, 2009, and on Friday the note had its biggest single-day sell-off in five months.
"The market was sitting at the high end of the trading range so that makes it very vulnerable to a large amount of volatility, which is what we have definitely been seeing over the past week," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co in Seattle.
Data earlier on Wednesday showing a surprise loss of U.S. private sector jobs lent only a fleeting bid to Treasuries.
"Technically we found a range in notes and bonds and a floor on yields," said Jim Barrett, senior market strategist with Lind-Waldock in Chicago.
"This news just wasn't negative enough," Barrett said. "The backdrop with the recent data has been so negative anyway so the market is ignoring it," he added.
Following the private payrolls data, ISM said its manufacturing index rose to 56.3 in August, beating economists' consensus forecast for a fall to 53.0. A reading above 50 indicates expansion in the sector.
Bond prices fell despite data showing construction spending at a 10-year low in July.
In terms of technical areas, analysts are citing the 2.67 percent area for the benchmark 10-year note's yield as price support and between about 2.50 and 2.40 percent as a key lower area.
However, longer term, some prominent bond analysts are betting that benchmark yields will fall steeply from current levels as the economy loses momentum heading into next year.
The 10-year U.S. Treasury note's yield is expected to fall below historic lows of 2 percent in the first quarter of 2011 because of weak economic growth, Bank of America Merrill Lynch Global Research said on Wednesday. (Additional reporting by Chuck Mikolajczak, Richard Leong and John Parry; Editing by Andrew Hay)

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