TREASURIES-Bonds slide on upbeat U.S. data, reduced Syria fears
* Worries over possible military action in Syria ease, pare safe-haven bids
* ISM U.S. factory index rises to highest in 26 months
* U.S. bonds off to weak September start after losses in August
* Two-year yield on course for highest close in over 2 years
NEW YORK, Sept 3 (Reuters) - The U.S. Treasury debt market stumbled on Tuesday, as traders pared safe-haven stakes in bonds after U.S. President Barack Obama said he would ask for congressional backing for a military strike against Syria.
Surprisingly strong U.S. manufacturing data, taken with encouraging data from China and Europe, stoked further selling in Treasuries, sending benchmark yields close to the two-year highs set about 1-1/2 weeks ago.
"The Syria issue had put a floor on bond prices last week. Now in the near term, it has been removed," said Mike Cullinane, head of government bond trading at D.A. Davidson in St. Petersburg, Florida. "All the strong economic numbers we have seen are also driving the selling," he added.
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. It is unclear whether U.S. lawmakers will support Obama's call for such a strike following remarks from several top officials, including Republican House Speaker John Boehner, who said he would side with Obama on the issue.
Analysts expect a strike will ultimately happen, which keep a floor on bond prices, but the uncertain timing of any such action averted a rebound in bond prices for the moment, they said.
U.S. benchmark 10-year Treasury notes last traded 26/32 lower in price for a yield of 2.885 percent, up 9.6 basis points from late on Friday. The 10-year yield earlier reached as high as 2.902 percent, or roughly 3 basis points below a 25-month high recorded on Aug. 22, according to Reuters data.
The 30-year bond shed 1-23/32 in price with a yield of 3.813 percent, up 9.6 basis points from Friday's close. The 30-year yield was about 12 basis points shy of the two-year peak, also set on Aug. 22.
Among shorter-maturities, the two-year note was on track to close at its highest yield since July 2011. It last traded at 0.422 percent, up 2 basis points on the day.
The Treasury debt market posted 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 recorded monthly losses for six consecutive months, according to Barclays data.
While Treasuries started September on a decidedly sour note, Wall Street stocks rallied with the Standard & Poor's 500 index up 1 percent.
U.S. financial markets were closed on Monday for the Labor Day holiday.
DATA BACK IN FOCUS
With any U.S.-led strike against Syria was on hold for now, traders will focus on this week's spate of economic data and determine whether they are robust enough for the Federal Reserve to shrink its $85 billion in monthly bond purchases, known as QE3, at its Sept. 17-18 policy meeting.
Some analysts expect the U.S. central bank to dial back its third round of bond-purchase stimulus as the economy seems to be expanding at a decent clip and unemployment is trending lower, although at a slower pace than policymakers would like at this point of the recovery.
Other analysts argue the economy remains too wobbly without the support of the Fed's current pace of Treasuries and mortgage-backed securities purchases. They say domestic growth is vulnerable as the recent surge in mortgage rates to two-year highs has set back the housing sector's recovery.
Recent weakness in orders for airplanes and big-ticket items also raised worries about manufacturers hitting a rough patch and speculation the Fed would refrain from deciding on reducing QE3 in two weeks time.
The Institute for Supply Management on Tuesday said its index on U.S. manufacturing activity rose to a 26-month high of 55.7 in August. Economists polled by Reuters had projected this manufacturing gauge likely slipped to 54.0 from 55.4 in July.
The government also said construction spending grew 0.6 percent in July, faster than the 0.3 percent forecast by analysts. This supported the view the U.S. economy kept some of momentum initiated in the second quarter.
These latest U.S. data as well as signs of renewed growth in Europe and resilience in China's services sector caused traders to pare Treasuries holdings ahead of the U.S. payrolls report on Friday.
A strong U.S. monthly jobs reading 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.
"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.