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US yields fall on perception of modest Fed tapering

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U.S. Treasurys yields fell further from two-year highs on Monday as more investors bet the Federal Reserve might scale back its bond purchases by a smaller amount at next week's policy meeting than they had thought.

Lingering worries over U.S. military action against Syria for its alleged use of poison gas against civilians underpinned some safe-haven bids for bonds, investors and analysts said.

Benchmark 10-year note yields slipped from 3 percent, prompted by Friday's payrolls report that showed employers added fewer jobs than expected in August, while jobs gains for June and July were revised downward.

The U.S. central bank is expected to reduce its $85 billion monthly bond purchase program, known as QE3, next Wednesday, though Friday's payrolls data has led some to expect the initial pullback may be modest, according to a Reuters poll.

Economists told Reuters after the latest jobs report they now expect the Fed to begin paring its purchases of Treasurys and mortgage-backed securities by $10 billion a month, down from the $15 billion median in Friday's primary dealer poll and a wider poll conducted in August.

"After the disappointing employment report on Friday the market is now expecting a very small amount of tapering, if tapering begins at all," said Gary Pollack, head of fixed income trading at Deutsche Bank Private Wealth Management in New York. "They can begin the process and see how the market reacts, instead of hitting the market all at once this is a very small punch instead of a big punch," he said.

Benchmark 10-year notes were last up 5/32 in price to yield 2.917 percent, down from 2.94 percent late on Friday. The 10-year yield was about 10 basis points below the 25-month high set before the payroll report on Friday but above its session low of 2.875 percent.

The five-year note yield fell on the day to 1.720 percent as traders also pared bets the Fed would soon raise interest rates after it halts QE3.

The yield on two-year notes, which is sensitive to investors' view on Fed rate policy, rose 1/32 to 0.443 percent after reaching 0.538 percent before the release of the jobs data on Friday, which was the highest since June 2011.

Economic data later in the week will also be closely watched for signs of strength in the economy, with retail sales data on Friday likely to be the most influential.

"It's arguably the last really important data point we see before the Fed's announcement next Wednesday," said Jason Rogan, managing director in Treasurys trading at Guggenheim Partners in New York.

—By Reuters.

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