TREASURIES-U.S. yields fall after Summers quits pursuit for Fed chief post
* Yellen now seen as front-runner as next Fed chief
* U.S./Russian pact on Syria seen paring safe-haven bids for bonds
* Futures signal traders pushing out timing on rate hike
NEW YORK, Sept 16 (Reuters) - Yields on U.S. government debt fell on Monday to their lowest levels so far in September as news Larry Summers withdrew from possible nomination as Federal Reserve chief inspired bond buying from investors who had feared more restrictive policies if he were to head the central bank. This surprising weekend development, which came two days before Fed policymakers meet and coincided with the five-year anniversary of the collapse of Lehman Brothers, was widely perceived as positive for bonds and stocks. Traders now expect current Fed Vice Chair Janet Yellen the front-runner to succeed Ben Bernanke, who will likely step down in January. Yellen is expected to continue the Fed's likely slow, cautious approach to reduce its current bond purchase stimulus, known as QE3. "Assuming Janet Yellen moves to the fore, it should reduce uncertainty across markets, increasing the likelihood of continuity at the Fed and an ultra-smooth transition," said Robert Tipp, chief investment strategist with Prudential Fixed Income in New Jersey. A Yellen-led Fed would likely mean the U.S. central bank will take its time to raise short-term rates, even after it halts QE3. This shift in thinking about Fed leadership manifested with the sharp drop in yields in short-dated Treasuries, which earlier this month rose to their highest levels since May 2011, partly on worries over Summers as the next Fed chief. Fed policymakers will meet on Tuesday and Wednesday, when Wall Street analysts anticipate they will decide on shrinking their current monthly $85 billion in purchases of Treasuries and mortgage-backed securities. News of Summers' withdrawal for consideration as Fed chairman was mitigated by a pact between the United States and Russia to secure and rid Syria of its chemical weapons under international supervision. Fears over a possible U.S. military strike against Syria had stoked safe-haven demand for bonds.
On the open market, the yield on two-year Treasury fell about 4 basis points from late Friday to 0.391 percent after hitting 0.375 percent earlier in overseas trading, which was the lowest level in about 2-1/2 weeks. Longer-dated yields fell sharply, too. Benchmark 10-year yield declined 8 basis points to 2.805 percent, near its session low and the lowest in two weeks. In the futures market, traders dialed back expectations the Fed will soon move away from its current near-zero interest rate policy adopted in December 2008, at the height of global credit crisis that caused the share price of the Primary Reserve Fund to fall below $1, or "break the buck." The demise of the U.S. money market mutual fund was seen as a watershed moment during the financial crisis that caused the Fed and other central banks to flood the banking system with cash to avert a massive global market collapse. Federal funds futures implied traders priced in a 61 percent chance of the central bank hiking rates at the end of 2014 , down from 68 percent on Friday, according to CME Group's FedWatch, which calculates traders' view on Fed policy.