* Below-forecast jobs growth raises doubts on Fed tapering bond buying
* Anxiety over Syria feeds pre-weekend demand for safe-haven debt
* Market rebound seen short-lived before next week's supply
* Futures suggest traders dial back expectations on rate hike
By Ellen Freilich and Richard Leong
NEW YORK, Sept 6 A U.S. bond rally pushed benchmark 10-year yields back below 3 percent on Friday after government data showing subdued U.S. job growth left traders wondering whether the Federal Reserve would trim its bond purchases as promptly as some had thought.
Further improvement in the labor market is seen as pivotal to the Fed's decision to reduce its $85 billion a month in Treasury and mortgage-backed securities purchases, known as quantitative easing, or QE.
The poor payrolls reading prompted traders to exit bearish bond bets after Thursday's global bond rout lifted U.S. yields to their highest in at least 25 months. But traders and analysts said market rallies fueled by short-covering tend to be brief.
The Labor Department reported that U.S. payrolls grew by 169,000 jobs in August, short of the 180,000 forecast by economists polled by Reuters.
But downward revisions to job numbers originally reported for June and July were even more troubling to economists.
The U.S. jobless rate, meanwhile, slipped to 7.3 percent, the lowest since December 2008, but the decline occurred because more people had given up the search for work.
The sharp downward revisions to the previous months' job growth and the lower workforce participation caused people to question the timing of cutbacks in the Fed's bond purchases.
"Perhaps the economy is not as strong as it seemed a few months ago," said Daniel Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas City, Missouri. "That adds to the indecision about whether the Fed will taper in September or decide to do it in December."
Benchmark 10-year Treasury notes rose 16/32 in price, after surging more than a point moments after the payroll data. Their yields fell to as low as 2.864 percent before retracing back to 2.936 percent. The 10-year yield had touched 3.007 percent overnight, its highest since July 2011.
The two-year yield, the most sensitive to changes in perception on the Fed's rate policy, was 0.466 percent, down from 0.526 percent at 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 hike a bit later into 2014.
Kansas City Fed President Esther George, a consistent monetary policy hawk who has argued for fewer Fed bond purchases all year, said on Friday the U.S. central bank should begin cutting its monthly bond purchases to around $70 billion a month at its mid-September policy meeting.
A Reuters poll conducted after Friday's release of U.S. employment data showed 13 of 18 primary government securities dealers expect the Fed to announce a cut in the size of its bond purchases - meant to stimulate the economy - at its Sept. 17-18 policy gathering.
While the latest set of U.S. employment data portrayed a labor market that was weaker than most had thought, some analysts said it was not poor enough to stop the Fed from dialing back its quantitative easing program.
"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.
With $65 billion of coupon-bearing supply scheduled next week, traders and analysts said the bond rally driven by the weak jobs figures could be short-lived.
"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 improving, 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.
Jitters over a potential U.S. military strike against Syria also revived safe-haven demand for bonds. U.S. President Barack Obama resisted pressure on Friday to abandon plans for air strikes against Syria and enlisted the support of 10 other G20 nations to call for a "strong" response to a chemical weapons attack.
These factors, together with another possible showdown over the federal debt ceiling between 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 upcoming meeting.
But Richard Schlanger, vice president and portfolio manager for Boston-based Pioneer Investments, with approximately $20 billion in fixed income assets under management, said the debt ceiling conflict might not interfere with rates trending higher.
"It will pass with continuing resolutions and the yield curve will continue to steepen a little bit with longer rates gravitating higher from current levels because the economy is going to be improving," he said.