* Below-forecast jobs growth raises doubts on Fed tapering
* Anxiety over Syria feeds pre-weekend demand for safe-haven
* Market rebound seen short-lived before next week's supply
* Futures suggest traders dial back expectations on rate
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
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
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
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.