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By Chris Reese

NEW YORK (Reuters) April 5- Prices of Treasuries lost more ground on Monday, with yields hitting three-month highs on stronger than expected U.S. service sector data and in a follow-through to Friday's strong March payrolls numbers.

"What you are seeing is a little follow-through from Friday, a little reaction to the (Institute for Supply Management) data this morning, and perhaps some dealer repositioning ahead of the five-year auction tomorrow," said Josh Stiles, senior bond strategist with IDEAglobal.com.

The Treasury will auction $16 billion in new five-year notes on Tuesday and $9.0 billion in 9-3/4-year inflation-protected paper on Thursday.

"There is also some concern about mortgage-related selling; people may need to lower their durations a bit," Stiles said.

Mortgage rates are expected to rise under pressure from 10-year Treasury yields that have gained 31 basis points in the last two trading sessions. Higher mortgage rates reduce the chance of early prepayments, allowing money managers to unwind some of their hedges by selling Treasuries.

As of Monday afternoon, the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) was down 16/32 in price, lifting yields to 4.21 percent from 4.15 percent on Friday.

The 10-year yields spiked 26 basis points on Friday when unexpectedly strong payrolls data fanned fears the Federal Reserve might hike official interest rates by as soon as this summer. Friday's rise was the biggest single-day yield rise since the LTCM hedge fund crisis of late 1998.

The 30-year bond (US30YT=RR: Quote, Profile, Research) had lost almost one point as of Monday afternoon, boosting its yield to 5.04 percent from 4.98 percent.

Yields on two-year notes (US2YT=RR: Quote, Profile, Research) , the most sensitive to thinking on official rates, climbed to 1.89 percent, having jumped 22 basis points to 1.85 percent on Friday.

The ISM reported on Monday its index of non-manufacturing activity jumped to a record high of 65.8 in March from 60.8 in February. Analysts had looked for a rise, but only to 61.5.

Prices paid also moved higher, while the ISM's employment component firmed to 53.9 from 52.7 in February, reaffirming the message from Friday's robust payrolls report.

Friday's jobs numbers remained the hot topic and the market will be listening carefully to this week's Fed speakers for any reaction to those figures.
Fed Bank of St. Louis President William Poole speaks on inflation on Tuesday while Fed Vice Chairman Roger Ferguson addresses the economy on Thursday.

Investors will also watch the amount of indirect bidding in Tuesday's five-year note sale for an indication of the degree of foreign central bank interest in U.S. government debt.

The Bank of Japan has been intervening strongly in foreign currency markets in recent weeks in an effort to stall yen strength against the U.S. greenback, but there have been indications the BOJ is scaling back its intervention, leaving it with fewer dollars to invest in U.S. Treasuries.

"The Japanese economy is clearly strengthening finally, and it is quite possible they will not be taking such a huge intervention role," IDEAglobal.com's Stiles said.

The last five-year sale drew bids for a respectable 2.47 times the amount offered, well above the 2.09 average of last year.

Indirect bidders, including customers of primary dealers and foreign central banks, took a hefty 44 percent of the issue.

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