TREASURIES-Yields rise as China data improve, Syria fears recede
* Chinese data, easing Syria concerns reduce bond demand
* Treasury sells $31 bln 3-year notes to solid bids
* Heavy orders for mega Verizon deal curb Treasuries demand
* Fed buys $1.39 bln TIPS due 2018-2043
NEW YORK, Sept 10 (Reuters) - U.S. Treasuries yields climbed on Tuesday as upbeat Chinese industrial output and retail sales data eased fears over an economic slowdown, while ebbing concerns about a Western-led attack on Syria also reduced demand for safe-haven U.S. debt. Stronger-than-expected industrial output reinforced other signs that China's economy was stabilizing after slowing for more than two years, just as major emerging markets brace for potential fallout from an expected trimming of U.S. stimulus, known as QE3. Concerns about a Western-led attack on Syria also decreased after U.S. President Barack Obama said Monday he saw a possible breakthrough after Russia proposed that its ally Damascus hand over its chemical weapons for destruction, which could avert the planned military strikes. "We're seeing some modest selling on not a lot of volume. It's related mainly to the better Chinese data and a press story that Syria seems to have agreed to Russia's proposal on chemical weapons. Those two things combined have led to less risk of an economic slowdown," said Ira Jersey, an interest rate strategist at Credit Suisse in New York. Solid investor demand at a $31 billion three-year note sale, part of the $65 billion coupon-bearing supply this week, briefly kept a lid on yields, but traders quickly turned to the remaining supply in 10-year and 30-year maturities on Wednesday and Thursday after the three-year auction. The latest three-year note due September 2016 cleared at a yield of 0.913 percent, which was the highest since May 2011. On the open market, benchmark 10-year notes were last down 8/32 in price to yield 2.944 percent, up 3 basis points from late Monday. The 10-year yield was roughly 6 basis points below the 25-month high set on Friday. The yield on the two-year note was up 1.6 basis points to 0.463 percent, while the 30-year bond yield was up 2.7 basis points at 3.879 percent.
VOLATILITY FROM SYRIA Treasuries are likely to remain sensitive to the risk of conflict with Syria, which could add volatility and complicate the sales of public and corporate bond supply this week. "We're still a little bit day-to-day and we've got more people trying to work out if the Syrian, Russian and U.S. negotiations can really bear fruit," said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee. Hedging by dealers and investors preparing for a record corporate bond deal by Verizon was also seen adding to pressure on Treasuries. The company is on track to sell the largest deal in history, with order books already surpassing $75 billion. Pricing is expected on Wednesday, according to IFR, a unit of Thomson Reuters. The Federal Reserve's policy meeting next week will be the next market focus after investors absorb this week's supply. Ten-year note yields have dropped from two-year highs of 3.01 percent reached Friday. A weaker-than-expected payrolls report led investors to bet the Fed may cut its bond purchases Friday's payrolls report showed employers added fewer jobs than expected in August, while jobs gains for June and July were revised downward. 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 in August. The Fed bought $1.39 billion in Treasury Inflation-Protected Securities (TIPS) due from 2018 to 2043 on Tuesday as part of its ongoing purchase program. Economic data later in the week will be closely watched for signs of strength in the economy, with retail sales data due out Friday likely to be the most influential.