August 27, 2013 / 4:43 PM / 4 years ago

TREASURIES-U.S. bond prices up as Syria worries spark safe-haven bid

* Talk of Western strike in Syria spurs safety bid

* Treasury to sell two-year notes at 1 p.m. EDT (1700 GMT

By Ellen Freilich

NEW YORK, Aug 27 (Reuters) - U.S. Treasury debt prices rose on Tuesday after reports that Western powers had told opposition forces a strike against Syrian President Bashad al-Assad's troops could occur within days, spurred buying of safe-haven U.S. government debt.

Losses on Wall Street, reacting to talk of possible Western airstrikes in Syria, also whetted investors' appetite for Treasuries.

"The concerns about a potential escalation in Syria have led to a risk-off move across the board and high-rated bonds like Treasuries have benefited from the flight to quality," said Jake Lowery, a Treasury trader at ING Investment Management.

U.S. allies were drafting plans for air strikes and other military action against Syria on Tuesday, as Assad's enemies vowed to punish a poison gas attack that Washington called a "moral obscenity." Meanwhile, U.N. experts trying to establish what killed hundreds of civilians in rebel-held suburbs of Damascus last Wednesday crossed the frontline on Monday to see survivors.

A rise in the German business confidence index, which normally would have been positive for stocks and negative for Treasuries, was largely ignored in light of the overarching concerns about Syria, traders said.

Similarly, a weekly report showing U.S. chain store sales rose 3.8 percent last week, but were up 0.3 percent in August to date from July, had little discernible market impact.

The S&P/Case-Shiller index showing home prices rose in June also had little impact, but bonds briefly trimmed gains after a stronger-than-forecast reading on consumer confidence.

"Generally, the economic picture in developed markets is one of positive surprises," Lowery said. "There's a reasonable outlook for the next U.S. payrolls report, and a high probability of the Fed announcing some asset purchase tapering at their September policy meeting. With that backdrop, the economic and monetary picture is not the cause for today's rally. It's the geopolitical risk related to Syria that is causing a flight to quality."

On Tuesday, prices on the benchmark 10-year Treasury note rose 11/32, their yields easing to 2.76 percent from 2.79 percent late on Monday.

Treasuries yields recently touched two-year highs after data suggested the world's biggest economy was ready for the Fed to back off its stimulus program, perhaps as soon as the bank's upcoming policy meeting on Sept. 17-18.

But yields have eased as fresh data has painted more of a mixed picture.

"The consumer confidence report didn't move the needle much for the market as people look to the employment data due in the first week of September to try to determine what that means for future purchases of Treasuries and mortgage-backed securities and how the Fed may adjust its purchasing program," said Roger Bayston, a director of Franklin Templeton's fixed income group in San Mateo, California, with over $390 billion in fixed-income assets under management.

Treasury auctions of $98 billion in new two-, five- and seven-year debt this week could keep yields from falling further. Those sales kick off on Tuesday with a $34 billion auction of two-year notes at 1 p.m. EDT (1700 GMT).

Strong demand emerged for the Treasury's $25 billion in 14-day cash-management bills on Tuesday, observed John Canavan, fixed-income analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. The bills mature on Sept. 12.

As part of its ongoing efforts to stimulate economic growth and cut unemployment, the Federal Reserve purchased $5.18 billion in Treasury coupons on Tuesday.

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