* 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
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
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
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.