TREASURIES-Bonds slide on upbeat economic data, reduced Syria fears
* ISM U.S. manufacturing index rises to highest in 26 months
* U.S. bonds off to weak September start after losses in August
* Two-year yield has highest close in over 2 years
By Ellen Freilich and Richard Leong
NEW YORK, Sept 3 (Reuters) - Prices of U.S. government debt fell on Tuesday as stronger-than-forecast economic data and a delay in any lack of action against Syria as U.S. President Barack Obama marshals congressional backing for a military strike prompted investors to sell Treasuries.
"The unwinding of some safe-haven activity related to Syria followed the weekend news that President Obama would seek congressional authorization for a military strike," said John Canavan, fixed-income analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
In addition, after some traders had covered their short positions ahead of the three-day holiday weekend, on Tuesday "they were prepared to put those short positions on again," he said, weighing on bond prices.
Surprisingly strong U.S. manufacturing data, following similarly strong data from Europe and China on Monday when U.S. financial markets were shut for the Labor Day holiday, encouraged more selling, temporarily sending benchmark yields close to the two-year highs set about 1-1/2 weeks ago.
When those levels brought no more selling, "that attracted a little bit of a short-covering bounce," Canavan said. "Prices ended quite a bit lower on the day, but above the earlier lows."
Stronger economic numbers make it more likely that the Federal Reserve, which will hold its next policy meeting on Sept. 17-18, will gradually remove monetary stimulus, primarily by cutting back on large-scale bond purchases.
U.S. benchmark 10-year Treasury notes slipped 22/32 in price. Their yields, which move inversely to price, rose to 2.87 percent from 2.79 percent on Friday.
The 10-year yield rose as high as 2.902 percent, about 3 basis points below a 25-month high recorded on Aug. 22, according to Reuters data.
The 30-year bond fell to 97 in price. Its yield rose to 3.79 percent from 3.70 percent at Friday's close.
Among shorter-maturities, the two-year note was on track to close at its highest yield since July 2011. It last traded at 0.418 percent, up from 0.403 percent on Friday.
While Treasuries started September on a weak note, Wall Street stocks rallied with the Standard & Poor's 500 index up 0.42 percent.
The Treasury debt market had negative returns for a fourth straight month in August, the longest such streak since a period spanning the end of 2010 to early 2011, when it incurred monthly losses for six straight months, according to Barclays data.
Financial markets were jittery last week over a possible widening of the conflict in the Middle East, which could disrupt oil exports and hurt the global economy. Traders had braced for a U.S.-led strike against Syria this weekend following chemical weapons attacks that U.S. officials say killed 1,429 civilians.
On Tuesday, U.S. Secretary of State John Kerry told the Senate Foreign Relations Committee there would be no "American boots on the ground with respect to the civil war," in Syria.
Also in traders' sights this week is economic data, which is under scrutiny for signs of whether the U.S. economy is strong enough for the Federal Reserve to begin to shrink its $85 billion in monthly bond purchases, known as QE3, at its upcoming meeting.
On Tuesday, the government said construction spending grew 0.6 percent in July, faster than the 0.3 percent forecast by analysts.
And the Institute for Supply Management said its index on U.S. manufacturing activity rose to a 26-month high of 55.7 in August.
With the post-holiday weekend price adjustments out of the way, and barring new developments with regard to Syria, market activity from here until Friday will largely become "a waiting game for Friday's employment figures," Stone & McCarthy Research Associates' Canavan said.
The government will release its payrolls data for August on Friday. Strong jobs gains would cement expectations the Fed would scale back its bond purchases starting in October, while a weak figure would revive bets the central bank would delay such a move.
Economists polled by Reuters estimate U.S. payrolls expanded by 180,000 jobs in August while the unemployment rate remained steady at 7.4 percent.
"The backdrop going into payrolls has improved," D.A. Davidson's Cullinane said. The Fed announcement of buying fewer bonds "will definitely happen in September. They have laid the groundwork."
In the meantime, the Fed on Tuesday bought $4.791 billion of Treasuries due September 2017 through May 2018 as part of its planned $45 billion of Treasury debt purchases in September.
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