TREASURIES-U.S. yields fall on perception of modest Fed tapering
* Benchmark yields recede further from 3 percent threshold
* Fed seen reducing bond purchases by $10 bln-Reuters poll
* Treasury to sell $65 billion of three-, 10-, 30-year bonds
* Three-year supply seen fetching highest yield since May 2011
NEW YORK, Sept 9 (Reuters) - U.S. Treasuries 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 Treasuries 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 9/32 in price to yield 2.901 percent, down 3.3 basis points from 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 5.5 basis points on the day to 1.704 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, fell again to 0.439 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 Treasuries trading at Guggenheim Partners in New York. The Fed bought $1.47 billion in bonds due 2037 to 2043 on Monday as part of its ongoing purchase program. Concerns over Syria also added a bid to the debt on Monday. Syrian President Bashar al-Assad denied that he was behind a chemical weapons attack on the Syrian people, as the White House on Sunday pressed ahead with the uphill effort of persuading Congress to approve a military strike to punish Assad.
The Treasury will sell $65 billion in new three-year, 10-year and 30-year bonds this week, which may add some pressure to the market in the coming days. It will auction $31 billion in three-year notes on Tuesday at 1 p.m. EDT (1300 GMT). "The three-year auction could go pretty well because it cheapened quite a lot," said Jeff Given, portfolio manager at Manulife Asset Management in Boston. In "when-issued" activity, traders expected the upcoming three-year offering due September 2015 to sell at a yield of 0.881 percent, which would be the highest yield at a three-year note sale since May 2011. Treasuries yields may also rise on hedging needs as Verizon prepares to launch a record-breaking corporate bond deal. The company is expected to sell $20 billion to $35 billion in debt later this week, according to IFR, a unit of Thomson Reuters.