* Below-forecast jobs growth raises doubts on Fed taper
* Anxiety over Syria lends safe-haven bids for bonds
* Market rebound seen short-lived before next week's supply
* Futures suggest traders dial back expectations on rate hike
By Richard Leong
NEW YORK, Sept 6 The U.S. bond market rallied on Friday with benchmark yields falling back below 3 percent as a government report showed disappointing job growth, leaving traders to question whether the Federal Reserve might pare its bond purchases soon.
Jitters over a U.S. military strike against Syria also revived safe-haven demand for bonds.
Further improvement in the labor market is seen as pivotal to the Fed's decision to reduce its bond purchases, known as quantitative easing, or QE.
The poor payroll reading was a catalyst for traders to exit their bearish bond bets following Thursday's global bond rout, which lifted U.S. yields to their highest in at least 25-months. Market rallies fueled by short-covering tend to be short-lived, analysts and traders said.
U.S. employers added 169,000 in August, the Labor Department reported, short of the 180,000 forecast by economists polled by Reuters. More alarming to some economists were the steep downward revisions to the job gains in June and July.
"The revisions, more importantly than the actual number, were revised down pretty aggressively. I think people are questioning whether tapering occurs or doesn't occur," said Scott Graham, head of U.S. government bond trading at BMO Capital Markets in Chicago.
The moderate job gain last month helped lower the jobless rate to 7.3 percent, the lowest since December 2008, but analysts downplayed the decline and attributed it to fewer people looking for work.
Policymakers want to see the unemployment rate closer to 6.5 percent.
Benchmark 10-year Treasury notes last traded up 24/32 in price, after surging over 1 point moments after the payroll data. Their yield fell to as low as 2.864 percent before retracing back to 2.904 percent. The 10-year yield had touched 3.007 percent overnight, a level not seen since July 2011.
The two-year yield, most sensitive to changes in perception on the Fed's rate policy, was 0.451 percent, down 6.7 basis points from Thursday's close. It had traded above 0.50 percent for the first time since June 2011 on Thursday.
Short-term U.S. interest-rate contracts implied traders pushed bets on the Fed's first rate a bit later into 2014.
Traders now see just a 46 percent chance of a rate hike in September 2014, down from 53 percent before the report, according to CME Group's Fed Watch, which calculates probabilities based on the price of Fed funds futures traded at the Chicago Board of Trade.
While the latest snapshot of the jobs market missed expectations, some argue it is not so poor the Fed will reverse its intent to dial back QE.
"This was a weak report, but it does not change the tapering call because it was not weak enough and there is a lack of corroborating evidence across the broader economic landscape to suggest a new lower jobs trend has emerged," TD Securities' global head of rates, currencies and commodity research, Eric Green, wrote in a research note.
Prior to the release of the payroll report, Chicago Fed President Charles Evans said the central bank can start shrinking its $85 billion monthly bond purchases later this year as the economy improves. He added it will likely need to hold policy rate near zero for another two years.
With $65 billion of coupon-bearing supply scheduled next week, the bond rally inspired by the weak jobs figures could be short-lived, traders and analysts said.
"With long-end Treasury supply next week, accounts will be willing to sell rallies on a weaker set of numbers," said Tom di Galoma, head of fixed-income rates sales at ED&F Man Capital in New York.
The U.S. economy, while continuing to improve, has not shown signs of accelerating. In fact, the surge in mortgage rates this summer due to the spike in bond yields might be slowing the housing recovery, analysts said.
Moreover, possible U.S. military action against Syria for its alleged use of poison gas against civilians has stoked worries about a disruption of Middle East oil exports, propelling oil prices higher and exerting a drag on the global economy, they added.
Russian President Vladimir Putin said on Friday his country will maintain economic and military support for Syria if it were to face foreign military action.
These factors, together with another possible showdown over the federal debt ceiling between President Barack Obama and Congress, might cause policymakers to refrain from shrinking the Fed's current monthly pace purchases of Treasuries and mortgage-backed securities at its Sept. 17-18 meeting.
BRIEF-Honeywell announces public offering of senior notes
* Honeywell International - Announced pricing of registered public offering of $1.25 billion 1.400% senior notes due 2019, $250 million floating rate notes due 2019
UPDATE 3-Venezuela PDVSA swaps $2.8 bln 2017 bonds, gains financial breather
CARACAS, Oct 24 Venezuelan state oil company PDVSA said on Monday a long-awaited bond swap had enabled it to delay until 2020 $2.8 billion in debt originally maturing next year, giving the cash-strapped company a financial breather.