The data undermined the safe-haven allure of US government debt, and combined with an easing of fears of impending bankruptcy in Greece, had benchmark 10-year Treasury notes on track for the biggest weekly jump in yield in almost two years.

The Institute for Supply Management said its index of national factory activity rose to 55.3 from 53.5 the month before. The reading topped expectations for 51.8, according to a Reuters poll of economists. A reading above 50 indicates expansion in the manufacturing sector.

"The economy has passed the tipping point risk and growth looks poised to resume a 3-percent-plus rate of gross domestic product growth in the second half of the year," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York, said following the release of the ISM data.

The benchmark 10-year note slid 11/32 in price to yield 3.21 percent, up from 3.17 percent late on Thursday. Treasuries prices have fallen throughout the week as the Greek parliament approved austerity measures that are required as a condition of a bailout package for the debt-ridden country.

The benchmark 10-year note was on track for the worst weekly price performance since early August 2009, lifting its yield from the six-month low of 2.84 percent touched on Monday.

The rising appetite for riskier investments this week has also hit the belly of the US Treasuries curve, with the five-year note set for the worst weekly performance since June 2009. The five-year note fell 6/32 in price to yield 1.83 percent from 1.78 percent late on Thursday.

"The modest rebound in the US ISM manufacturing index in June ... will ease fears that the US is heading towards a double dip recession," said Paul Dales, US economist at Capital Economics in Toronto.

The two-year Treasury note dipped 1/32 in price to yield 0.49 percent, up from 0.47 percent late on Thursday, while the 30-year bond lost 13/32 in price to yield 4.40 percent, up from 4.38 percent late on Thursday.

Copyright Reuters, 2011