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

By Richard Leong

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 (Kuala Lumpur: 7018.KL - news) 's

FedWatch, which calculates traders' view on Fed policy.